U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

58–338 PDF 2010

CONTINUING TO DELIVER: AN EXAMINATION OF

THE POSTAL SERVICE’S CURRENT FINANCIAL

CRISIS AND ITS FUTURE VIABILITY

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON FEDERAL WORKFORCE,

POSTAL SERVICE, AND THE DISTRICT

OF COLUMBIA

AND THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

APRIL 15, 2010

Serial No. 111–74

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

JUDY CHU, California

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF

COLUMBIA

STEPHEN F. LYNCH, Massachusetts, Chairman

ELEANOR HOLMES NORTON, District of

Columbia

DANNY K. DAVIS, Illinois

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

WM. LACY CLAY, Missouri

GERALD E. CONNOLLY, Virginia

JASON CHAFFETZ, Utah

MARK E. SOUDER, Indiana

BRIAN P. BILBRAY, California

ANH ‘‘JOSEPH’’ CAO, Louisiana

WILLIAM MILES, Staff Director

(III)

C O N T E N T S

Page

Hearing held on April 15, 2010 .............................................................................. 1

Statement of:

Goldway, Ruth, chairman, Postal Regulatory Commission; David Williams, Inspector General, Office of Inspector General, U.S. Postal Service; John O’Brien, Senior Advisor to the Director, U.S. Office of Personnel Management; and Kevin Kosar, Analyst in American National Government, Congressional Research Service .................................................. 159

Goldway, Ruth ........................................................................................... 159

Kosar, Kevin .............................................................................................. 183

O’Brien, John ............................................................................................. 175

Williams, David ......................................................................................... 168

Potter, John E., Postmaster General and CEO, U.S. Postal Service; and

Phillip Herr, Director, Physical Infrastructure Issues, U.S. Government

Accountability Office ..................................................................................... 12

Herr, Phillip ............................................................................................... 23

Potter, John E. ........................................................................................... 12

Letters, statements, etc., submitted for the record by:

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, followup question and response ........................................................... 136

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 212

Goldway, Ruth, chairman, Postal Regulatory Commission, prepared statement of ........................................................................................................... 162

Herr, Phillip, Director, Physical Infrastructure Issues, U.S. Government

Accountability Office, prepared statement of ............................................. 25

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 7

Kosar, Kevin, Analyst in American National Government, Congressional

Research Service, prepared statement of .................................................... 185

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts, prepared statement of ................................................... 3

Maloney, Hon. Carolyn B., a Representative in Congress from the State

of New York, followup question and response ............................................ 124

National Association of Retired Federal Employees, prepared statement

of ..................................................................................................................... 155

O’Brien, John, Senior Advisor to the Director, U.S. Office of Personnel

Management, prepared statement of .......................................................... 177

Potter, John E., Postmaster General and CEO, U.S. Postal Service, prepared statement of ........................................................................................ 14

Speier, Hon. Jackie, a Representative in Congress from the State of

California, followup question and response ................................................ 142

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, followup question and response .................................... 148

Towns, Hon. Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 153

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 214

Williams, David, Inspector General, Office of Inspector General, U.S.

Postal Service, prepared statement of ......................................................... 170

(1)

CONTINUING TO DELIVER: AN EXAMINATION

OF THE POSTAL SERVICE’S CURRENT FINANCIAL CRISIS AND ITS FUTURE VIABILITY

THURSDAY, APRIL 15, 2010

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM, JOINT WITH THE SUBCOMMITTEE ON FEDERAL WORKFORCE, POSTAL SERVICE, AND THE DISTRICT OF COLUMBIA,

Washington, DC.

The committee and subcommittee met, pursuant to notice, at 10

a.m., in room 2154, Rayburn House Office Building, Hon. Stephen

F. Lynch (chairman of the subcommittee) presiding.

Present: Representatives Lynch, Maloney, Cummings, Kucinich,

Tierney, Clay, Watson, Connolly, Quigley, Davis, Foster, Speier,

Driehaus, Chu, Issa, Burton, Duncan, Jordan, and Luetkemeyer.

Staff present: Peter Fise, staff assistant; Adam Hodge, deputy

press secretary; Carla Hultberg, chief clerk; Marc Johnson and

Ophelia Rivas, assistant clerks; Michael Kubayabda, counsel; Mark

Stephenson, senior policy advisor; Ron Stroman, staff director; William S. Miles, staff director, Subcommittee on Federal Workforce,

Postal Service, and the District of Columbia; Larry Brady, minority

staff director; John Cuaderes, minority deputy staff director; Rob

Borden, minority general counsel; Adam Fromm, minority chief

clerk and Member liaison; Stephanie Genco, minority deputy press

secretary; Howie Denis, minority senior counsel; and Alex Cooper,

minority professional staff member.

Mr. LYNCH. Good morning and welcome.

What is encouraging about today’s hearing is that it is being convened to specifically discuss suggested solutions for addressing

what many have called an unsustainable business model in need

of urgent attention and reform. I have had a chance to review both

the Postal Service’s action plan for the future as well as the recently released GAO report on strategies and options to facilitate

progress toward financial viability, and I commend both of those

entities for your thorough analysis.

And, given the Postal Service’s currently dire situation, both of

these reports rightfully touch on some critical and highly controversial issues such as calling for major changes in the frequency of

mail delivery, statutory pricing, facility and network optimization

and employee compensation and benefits.

I think we all get the fact that the difficult times will require

some difficult decisions to be made, and the impact of some of these

2

decisions will more than likely fall heavily across the board, affecting the Postal Service, its customers, employees, stakeholders, and

others.

While at the moment there may not be exactly a consensus on

what needs to be done to bring about the financial recovery of the

Postal Service. The one thing we believe we are all in agreement

on is that doing nothing is no longer a viable option. The keystone of a $1.2 trillion mailing industry and the employer

of nearly 700,000 Americans, the solvency and long-term operation

of the U.S. Postal Service is essential to our national economy and

to our way of life, which is why I am glad that today’s hearing

gives us an opportunity to lay everything from the value of mail

nowadays to the debate over the Postal Service’s civil service retirement system out on the table for deliberation and consideration.

I appreciate today’s witnesses for being here with us this morning to offer their suggested strategies on how best to increase revenue, reduce cost, and improve efficiency going forward in order to

help ensure the future financial viability of the Postal Service.

Again, I would like to thank the chairman, Mr. Towns, for agreeing to hold this joint hearing, and I look forward to an informative

discussion this morning.

On our first panel we will hear from the Postal Service and GAO

on their reports, while our second panel will discuss the impact of

these recommendations and the CSRS pension issues.

Again, I thank all of our witnesses for appearing today, and I

look forward to their testimony.

[The prepared statement of Hon. Stephen F. Lynch follows:]

3

4

5

Mr. LYNCH. I now yield 5 minutes to our ranking member, Mr.

Darrell Issa from California, for his opening statement.

Mr. ISSA. Thank you, Mr. Chairman.

Mr. Chairman, last year we worked together on a bipartisan

basis to provide a temporary fix. This committee had hoped that fix

would be slightly longer; however, at the end of the day it was a

1-year kick the can down the road fix. Today, it is clear that before

any fix of any sort is considered by this committee, we must have

a plan that will bring right-sizing, solvency, and a continued level

of high service by the Post Office.

Without that level of high service, we do not meet our Constitutional responsibility, which this committee has direct oversight on.

Without right-sizing, the services versus the people versus the

equipment versus—and I am going to cross the line that we never

want to cross—versus the number of physical locations around the

country manned by postal personnel, we cannot get even.

For more than 30 years I have been either an executive or member of the board of a company. I still sit on a public company. We

are the fiduciaries of your enterprise. As fiduciaries of your enterprise, we must tell you, you have at the current time more or less

a third more people than you are properly using. If you were to use

the minimum amount of people, highly motivated, properly compensated, you would clearly have a dramatic amount of less people.

Having said that, we have been remiss from the dais in meeting

our responsibility. During the last year since we began dealing specifically under this chairmanship with this problem, the Federal

work force has grown by nearly as many, if not more, than the

amount of people at your surplus. Postal workers are Federal workers. Postal workers are vested in an equivalent system and a

transferrable system to that which we here on the dias and all Federal workers are in.

Although there are some slight differences, it is very clear that

we have not recognized that if the postal system has more workers

than it needs, the Federal work force in general has less than it

needs, postal workers represent what is or has been a highly motivated, fairly compensated group of individuals at all levels, entry,

managerial, supervisal, and executive.

I hope today, in addition to prepared statements that we have

read and we will hear capsulated, that we will hear about the kind

of synergies the Federal Government needs to achieve in duties,

and from the dias many have suggested that the census should

have been done all or in part by those Federal workers presently

working for the post office, and other innovative ideas that could

be done to make better use of postal facilities.

But more importantly, you must leave here today understanding

that Congress needs a plan, like any other Board of Directors, that

passes the sniff test, that will, in fact, be reasonable for us to say

to the American people the post office will be self-sufficient and solvent, which is a requirement of Congress, but, more importantly,

that we are not wasting the time and energies of so many people

who have in the past been well-motivated, loyal workers to the

postal system by simply saying, sit in the green room, blue room,

any color room you have, but today many of them sit in waiting

rooms. Nothing is more demoralizing to a worker than to be excess

6

with no plan to deal with that in the future. No postal worker

should be given a route that is less than a full day’s work. No postal worker should be on the ready if, in fact, that ready bell is not

likely to ring.

So, Mr. Chairman, I have been supportive of the postal workers.

I intend to continue to be, but I want to make sure that we are

doing the best thing we can for those people, and if the American

people are watching us hire throughout the Federal work force people who, with transition funds that we could authorize and appropriate, could find themselves in permanent positions, I do not want

to wait until it is time to put people on the street who otherwise

would be gainfully employed in the Federal service that they

signed up for 1, 2, 5, 20, or 30 years ago.

Mr. Chairman, I look forward to the comments and I look forward to working together on a bipartisan basis to fix this troubling

problem.

I yield back.

[The prepared statement of Hon. Darrell E. Issa follows:]

7

8

9

Mr. LYNCH. I thank the gentleman. By prior agreement, the

Chair recognizes Mr. Kucinich for 5 minutes.

Mr. KUCINICH. I thank the chairman for holding the hearing on

this matter of great significance to the American people.

I want to begin by thanking the men and women who have dedicated their lives to making sure that the commerce of this Nation

moves through the mail. Many of you made a life commitment to

that work, and it ought to be received with great appreciation by

this Congress and by the American people.

The financial issues that are facing the Postal Service will be

dealt with, and I am hopeful that this committee will have the opportunity to deal with it in a way that preserves the good faith

which the people who serve the U.S. Postal Service have a right

to expect from this Congress, and will preserve the appreciation

which the American people have for those who are involved in the

delivery of the mail.

I understand the importance to local communities of the Postal

Service, and I am committed to working with all stakeholders to

ensure its financial viability.

In November of last year, this subcommittee held a hearing to

examine possible methods of revenue generation, and we know that

since then we have seen a great amount of money continue to be

lost and the postal consolidation campaigns persist. I am concerned

that some of the proposals being considered could lead to the privatization of essential services.

As someone who has had to deal with privatization issues many

years ago as a mayor of a city, I can promise you that this is one

Member who is not going to sit by and let you use the excuse of

financial difficulties as a path to privatize a service that first and

foremost ought to be a commitment to the American people of regular delivery of the mail at a fair and reasonable price.

I strongly believe there are ways to generate revenue without

cutting jobs and essential services. The GAO report makes the observation that 300,000 postal employees are expected to retire

through 2020. It points out that in a 3-year period over 84,000 employees were reduced from the career work force. So it is not as

though people aren’t looking for ways to operate more efficiently

with less people. We have to be careful that we don’t, through the

desire to try to make this system work more efficiently, harm its

ability to deliver the mail.

My constituents continue to express their concern over post office

closing, especially in low-income communities with little or no access to transportation or technology. Ultimately, it is going to be

up to the Congress to give the Postal Service the flexibility it needs

to implement vital revenue generation methods. At the same time,

it is our responsibility to ensure that methods of revenue generation do not come at the cost of universal access and the jobs that

have been vital to the communities we represent, because universal

access is something that is important to the people of this country

and it is a major economic issue in communities across America,

and it should not be denied to people because they happen to be

on a lower end of the economic ladder.

The Postal Service has a very powerful infrastructure already in

place, and that should be utilized in any future plan. Instead of

10

consolidating branches and its work force, the Postal Service

should examine ways it can provide services and training for its

employees that will allow it to complete with some of the other entities that are already out there.

Chairwoman Goldway and National Postal Worker Unions have

provided excellent ideas that warrant further examination, such as

providing Government services at local post offices and providing

retailers a space to sell their services or products.

As the economy moves toward recovery, we must ensure that

local post offices are there to serve the local community.

I thank the chairman.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the ranking member of the Postal Subcommittee for 5 minutes.

Mr. CHAFFETZ. Thank you, Mr. Chairman. I do appreciate the bipartisan approach in working on these issues, and I do appreciate

the efforts that the Postal Service has made.

I am new to this as a freshman here, and I have actually got to

tell you that I was pleasantly surprised and appreciative of the fact

of how the Postal Service has been addressing the financial needs

in a very proactive way and a very difficult way, but being financially responsible and having that at the top of their agenda.

There are difficult decisions to be made. They are going to be

painful any way you slice it. But I only wish every other agency

within the Federal Government would be as responsive to the financial needs within their agency and their department as the

Postal Service has been.

Again, they are upside down financially and struggling, but,

again, I wish other departments and agencies would have the same

type of approach in being responsible, making difficult decisions,

and making the cuts that need to be there.

I also do believe that we need to continue the discussion on the

relevancy of the Postal Service and making it more relevant in the

business community, making it more relevant in people’s lives, and

how to drive revenue. We have had good discussions and will continue to have good, hard discussions about where to cut costs, but

we also need to continue that discussion about how to become more

innovative and how do we service the American people in a better

way that will actually drive revenue forward.

Personally, I have deep concerns about the move from a 6-day

delivery down to a 5-day delivery. I think there should be a blend.

My personal approach to this is that we should give you some flexibility to find ‘‘postal holidays’’ so that you can have the flexibility

to take the least, the days that we know that there is less demand

and less need in the marketplace to actually deliver, but to say

that we are going to eliminate 52 days of service is not going to

necessarily drive volume forward.

I don’t think eliminating Saturday delivery before the Christmas

holiday is necessarily wise. When you look at the fact that we have

Mother’s Day on a Sunday, I don’t think the marketplace is going

to be very happy about not being able to deliver mail on Saturday.

Also, if you look at it in a given year, we will have eight or nine

holidays where you will not have service on a Monday or a Friday

because there is a national holiday, so there are 8 or 9 weeks out

11

of the year where we would go for 3 days with no postal delivery

services, and there are many unintended consequences where credit card bills and medicine that may be delivered through the mail

and those types of things that I think they need to be more thoroughly explained.

Again, I would hope that we would explore a blend where we

give you some flexibility to find that Saturday in August nobody is

going to miss it so you can trim costs.

The other thing, Mr. Chairman, that I hope we look at is I still

believe that this country lacks in energy policy. If you look at the

fuel prices, in January 2009 they were less than $2 a gallon. Now,

at least in Utah, I am paying more than $3 a gallon. This country

does not have an energy policy, and when we have rising energy

costs one of the consequences is a tremendous expense to the Postal Service in the delivery of its goods and services.

Obviously, the biggest thing out there that we have to talk about

that is difficult is labor. When you have 80 percent of your expenses tied up in the labor pool, there are going to have to be some

very difficult decisions and discussions. I know we have some tough

labor negotiations that are coming up. We need to talk about rightsizing the Postal Service and dealing with that. As Congressman

Issa talked about, it would be better, best if we could make some

of the transition in the astronomical growth we have in the other

departments and agencies and being able to transition some of the

good Federal workers there at the Postal Service into other applicable jobs. I would hope that we would do a better job of making

those transitions.

And then certainly one of the big things that I want to more

thoroughly understand, Mr. Chairman, is the CSRS pension issues

that we have out there because that over-funding issue is something that we can’t just deal with on a Band-aid on a year-by-year

basis. But, as Ranking Member Issa said, we have to deal with it

in a long-term fashion.

So those are some of my thoughts and perspectives. I look forward to this discussion and ongoing discussion and appreciate the

bipartisan way in which we are doing this.

With that I yield back, Mr. Chairman.

Mr. LYNCH. I thank the gentleman.

We will now turn to our first panel of witnesses. It is the committee’s policy that all witnesses to offer testimony have to be sworn.

Will the witnesses please stand and raise your right hands as I administer the oath?

[Witnesses sworn.]

Mr. LYNCH. Thank you. Let the record show that the witnesses

have each answered in the affirmative.

I am going to ask you to bear with me while I do two brief introductions.

Mr. John E. Potter serves as the Postmaster General and CEO

of the U.S. Postal Service. Mr. Potter was named the 72nd Postmaster General of the United States of America on June 1, 2001.

He currently sits on the Postal Service Board of Governors and is

vice chairman of the International Postal Corp., an association of

23 national posts in Europe, North America, and the Asia Pacific.

12

Mr. Phillip Herr is currently the Director of Physical Infrastructure Issues at the U.S. Government Accountability Office. Since

joining GAO in 1989, he has managed reviews of a broad range of

domestic and international programs. His current portfolio focuses

on programs at the Department of Transportation and the U.S.

Postal Service.

Mr. Potter, you are now welcome to offer a 5-minute statement.

Thank you.

STATEMENTS OF JOHN E. POTTER, POSTMASTER GENERAL

AND CEO, U.S. POSTAL SERVICE; AND PHILLIP HERR, DIRECTOR, PHYSICAL INFRASTRUCTURE ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF JOHN E. POTTER

Mr. POTTER. Good morning, Mr. Chairman and members of the

committee.

For the past 2 years I have testified about the dire financial situation facing the U.S. Postal Service. Today we stand on the brink

of financial insolvency, and our cumulative losses could exceed

$238 billion by 2020.

I am pleased to report that the Postal Service does have a plan

for action to close the growing gap between revenues and expenses;

however, before discussing our plan, I would like to comment on a

recent audit by our Inspector General concerning the Postal Service

over-payments to the Civil Service Retirement System pension

fund.

The IG’s report is of such significance that it could have an enormous bearing on the speed with which we need to make changes

outlined in our plan. The IG found that an inequitable and unreasonable cost sharing methodology was used when the former Post

Office Department was reorganized into the Postal Service. That

methodology caused the Postal Service to contribute a disproportionate share of CSRS pension costs, resulting in a $75 billion overpayment. We support the IG’s recommendation for dividing the responsibility of funding CSRS retirements for our employees by

splitting the total pension obligation between pre- and post-1971

employment.

Refunding the $75 billion to the Postal Service would not eliminate the need for us to take additional actions, but it would lessen

the immediate financial crisis we are facing. I urge you to take a

close look at this critical issue as the first step in resolving the

Postal Service financial challenge.

The way Americans communicate has changed dramatically, and

the Postal Service has to change. Our management team, with the

support and approval of our Board of Governors, has developed a

responsive, ambitious, and balanced plan that offers a way forward

for a fiscally sound Postal Service. To help close the forecasted

$238 billion gap by 2020, our action plan has identified $123 billion

of cost savings that are within postal control, and we are implementing those actions today.

We are also focused on growth and we are introducing new products and pricing incentives consistent with our mission, and we are

expanding and modernizing our retail access. I am confident that

13

these strategies and other steps from our action plan will allow the

Postal Service to remain a viable and valuable entity into the future, allowing us to continue to maintain and finance universal

service nationwide; however, we do need congressional help in

some key areas to provide management with the flexibility to deal

with our financial situation.

Specifically, we request your assistance in restructuring the prefunding of retiree health benefits, adjusting the frequency of mail

delivery, providing the freedom to offer access to postal services in

places other than traditional post offices, requiring arbitrators to

consider the financial condition of the Postal Service, applying the

Consumer Price Index price cap to all market-dominant products as

opposed to on a class-by-class application, introducing new products

consistent with our mission, and, finally, helping us to acquire

more streamlined oversight.

The first two of these proposed changes will generate the largest

and most immediate financial benefits and move us toward narrowing our financial gap. If Congress is unable to act this fiscal year

on broader legislation, our projections show that we will risk running out of cash early in fiscal year 2011; therefore, should there

be insufficient time this year to pass comprehensive legislation, the

Postal Service will require a reduction in our retiree health benefit

trust fund payment this year similar to 2009.

We recognize that our agenda is ambitious and that the challenge will be finding the right balance between taking actions necessary to mitigate our financial crisis, while at the same time implementing a smooth transition for our customers and our employees.

The GAO recognizes the challenge facing us, too. In their recently released report on the Postal Service, they do a thorough job

of reviewing a series of complex issues and strategies for long-term

structural and operational reform. I am pleased that many of the

GAO’s findings are consistent with the analysis and the Postal

Service action plan, and that the GAO agrees with us that we need

congressional action on removing some of our current legal and regulatory constraints.

One area where we disagree with the GAO is their recommendation that additional panels of experts or commissions be established

to develop legislative options or proposals for change. Due to the

urgency of our finances, we cannot support this. We believe that a

sufficient body of evidence exists to help guide the Congress on the

changes needed for the future. Our action plan provides us a solid

path to ensure that the Postal Service remains strong, healthy, and

viable into the future.

Our challenges are urgent, and I look forward to working with

the Congress, the GAO, the PRC, and the entire postal community

in implementing the best choices for success.

Thank you for your support of our ongoing efforts to ensure a

sound Postal Service, and I will be happy to answer any questions

you may have.

[The prepared statement of Mr. Potter follows:]

14

15

16

17

18

19

20

21

22

23

Mr. LYNCH. Thank you, Mr. Potter.

Mr. Herr, you are now recognized for 5 minutes.

STATEMENT OF PHILLIP HERR

Mr. HERR. Thank you. Chairman Lynch, Ranking Members Issa

and Chaffetz, and members of the committee, I am pleased to participate in this hearing and discuss GAO’s report that was released

this week. Today I will focus my remarks on the Postal Service’s

financial condition and forecast and strategies and options to facilitate progress toward its financial viability.

Turning first to the Postal Service’s financial condition, as mail

volume declined by 36 billion pieces in fiscal years 2007 through

2009, the Postal Service’s financial viability has deteriorated, leading to $12 billion in losses. Current forecasts for the mail volume

will decline to 167 billion pieces this fiscal year, the lowest level

since 1992.

The Postal Service projects a record loss of over $7 billion this fiscal year, while adding $3 billion in debt. Its outstanding debt

will increase to $13.2 billion, close to its $15 billion statutory limit.

The Postal Service does not expect mail volume to return to its

former levels when the economy recovers. The continuing shift to

electronic communications and payments has fundamentally

changed how mail is used. By fiscal year 2020 the Postal Service

projects further volume declines to 150 billion pieces, the lowest

level since 1986. First class mail volume is projected to decline by

another 37 percent over the next decade, and less profitable standard mail, primarily advertising that is subject to economic fluctuations, is projected to remain roughly flat over the next decade.

Turning to actions needed to facilitate the Postal Service’s financial viability, in July 2009 GAO added the Postal Service’s financial

condition to our high-risk list and reported that action is needed

in multiple areas for the Postal Service to make progress toward

financial viability. We identified strategies and options that fall

into three major categories.

First, compensation and benefits currently represent 80 percent

of Postal Service cost, presenting cost savings opportunities. In

terms of retirements, about 162,000 postal employees are eligible

to retire this fiscal year, and about 300,000 are expected to retire

over the next decade. In terms of benefit costs, postal employees

have about 80 percent of their health benefit premiums paid, 8 percent more than most Federal employees.

Second, cost savings can be achieved by consolidating processing

and retail networks, given mail volume declines. Removing excess

capacity is necessary in the 600 processing facilities where firstclass mail processing capacity exceeds needs by 50 percent. The

network of 36,500 retail facilities can also be reduced. Maintenance

has been under-funded for years, resulting in deteriorating facilities and a maintenance backlog. Approximately 30 percent of postal

revenue currently comes from stamps purchased at non-postal locations such as grocery stores, indicating the customer has begun

shifting to alternatives.

Another opportunity is consolidating the field administrative

structure by reviewing the need for 74 district offices and an additional 8 area offices. And, because cost-cutting alone will not enVerDate 11-MAY-2000 14:19 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 U:\DOCS\58338.TXT KATIE PsN: KATIE
24

sure a viable Postal Service, generating revenue through pricing

and product flexibility is needed. The new flat rate priority mail

boxes are an example of how the Postal Service has successfully

generated new revenues.

Turning to our report’s matters for congressional consideration,

to facilitate progress in difficult areas such as realigning postal operations and its work force, Congress may wish to consider an approach similar to a BRAC-like commission used by the Department

of Defense. Congress has previously turned to panels of independent experts to restructure organizations and establish consensus.

We believe the commission could also help to ensure that Congress

and stakeholders have confidence in resulting actions.

We also suggested Congress consider change in two other areas.

One would be to revise the statutory framework for collected bargaining to ensure that binding arbitration takes the Postal Service’s financial condition into account. Another change to consider is

modifying the Postal Service’s retiree health benefit cost structure.

We believe it is important that the Postal Service fund its retiree

health benefit obligations to the maximum extent its finances permit.

Currently, about 460,000 retirees and their survivors receive this

benefit and another 300,000 postal employees are expected to use

it by 2020. In considering revisions, it will be important to assess

what the Postal Service can afford, strike a fair balance of payments between current and future rate payers, and determine how

changes would affect the Federal budget.

Mr. Chairman, in conclusion, no single change will be sufficient

to address the Postal Service’s pressing challenges. The longer it

takes to realign the Postal Service to the changing use of the mail,

the more difficult change will be.

This concludes my prepared statement, and I am pleased to answer any questions that you or members of the committee have.

Thank you.

[The prepared statement of Mr. Herr follows:]

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

Mr. LYNCH. Thank you, Mr. Herr.

I now yield myself 5 minutes for questions.

Mr. Potter, one of the central considerations here is to shift to

a 5-day delivery model, and that concerns me greatly, both with respect to the idea of universal service and also the impact on employees within the Postal Service and how we are going to manage

this if that is the direction that we go in eventually.

Now, I know that, I think, during your tenure, if I am not mistaken, the post office has already reduced the size of your work

force by about 200,000 employees since 2001, which I believe is

when you came in. And no one can argue that you haven’t done a

significant job here in terms of reducing the size of the work force.

I think it was 900,000. Now it is about 700,000, maybe a little less,

so there has been significant down-sizing already, or right-sizing,

as some people have described it. But this shift from 6-day to 5-

day, if it were to be embraced, can you lay that out for me?

Look, I come from a postal family, letter carriers, mail handlers,

clerks. What is the shake-out on that, and what do you see as the

impact of that change?

Mr. POTTER. Well, first of all let me say that I am very sensitive

to some of the comments that Congressman Chaffetz said in his

opening remarks, but I think the Postal Service is positioned today,

best positioned today to make the change in frequency of delivery,

and the reason I say that is because I believe that today we could

accomplish that without laying off a career employee.

We have flexibility in our system right now. We have a lot of

folks who are eligible to retire today. From the National Association of Letter Carrier’s side of the aisle, the city carriers, we have

some 13,000 non-career employees who were hired knowing that

their jobs would be eliminated at some point in time, so that transition for those 13,000 can happen immediately.

We have use of overtime today to the tune of some 9,000 fulltime equivalent employees. We can tighten up on that. We have a

high number of people who are eligible to retire who could be

incented to go.

On the rural carriers’ side, the way most rural carrier routes are

constructed, the 6th day of delivery is provided by a non-career employee.

So I think that the time for change on frequency of delivery is

now, because it can be accomplished without laying people off. If

we wait too long in the future, a lot of those non-career employees

that I just described on the city side, the flexibility to use them is

limited and it will go away, and so we would position ourselves to

have to hire career employees in the interim. I think we are about

a year away from having to hire to keep our routes staffed. And

the time to change is now. And if we did hire within a year, those

folks would obviously be people who would have to be laid off later

on in the process.

So my opinion, there is a need to address the fact that we are

delivering less mail per day. We delivered five pieces on average

when I first came into the business; we are down to four pieces of

mail per day being delivered, and it is on its way to three, based

on a Boston consulting group’s forecast.

120

If you look at using 2009 dollars, we were delivering $1.80 per

day per delivery in 2001. That $1.80 per day per delivery is down

to $1.40. We have been able to mask that change by the reduction

in work force, focused with our unions on productivity. Going forward, it appears that we will have about $1 per day in 2020 being

delivered.

That is really the challenge that we all have to face. Granted,

there are options here, but one of the solutions has to be to adjust

the frequency of delivery. It has to make a contribution to closing

the gap that we have now and projected into the future.

Mr. LYNCH. Thank you. My time has just about expired. I will

now yield to the ranking member, Mr. Issa, for 5 minutes.

Mr. ISSA. Thank you very much, Mr. Chairman.

I heard something that concerns me. All the reports that I have

seen show that you have excess personnel today with 6-day delivery. Is that true?

Mr. POTTER. We have excess—well, let me just describe.

Mr. ISSA. If it isn’t Christmas, do you have people sitting in

ready rooms and do you believe that you are fully utilizing at the

most efficient, effective, and highest utilization based on best practices all of your people at all levels of executive supervisor and all

the way down to letter carriers?

Mr. POTTER. The answer is no. Are we operating in an optimum

world? The answer is no. You spoke about the fact that we have

people who are taken off the workroom floor, and you call it a

ready room. It is called whatever it is all over the country.

Mr. ISSA. The articles generally have a term like that.

Mr. POTTER. But the fact of the matter is one of the concerns we

have if we leave people on the workroom floor with nothing to do

they are going to find something to do and make ourselves less productive.

Mr. ISSA. I am completely supportive that we piddle around, as

they used to call WPA. You have to find gainful work.

Mr. POTTER. Right.

Mr. ISSA. No matter how much you are willing to be compassionate, you are not doing anyone a favor.

Mr. POTTER. Right.

Mr. ISSA. Having said that, why is it you are not here today

showing us a plan and hopefully, if you have the authority, and if

not, ask us for authority, an execution on right-sizing the force?

How many billions of dollars would have been saved if you had already aggressively right-sized the force before you came to say I

want to go from 6 days to 5? Is it $12 billion? Is it $10 billion? Is

it $6 billion? How much of that $12 billion would we have seen if—

and I am assuming you have the authority, but if you don’t, that

is part of what we are here for. How much would have been saved?

Mr. POTTER. Well, I don’t have an exact number. It is a

couple——

Mr. ISSA. Would it surprise you that the articles indicated it

would be about $7 billion that they guess you would have saved

had you had an optimized work force with or without the help of

Congress? And we are not talking about the one-time cost of

transitioning people. We are talking about on a go-forward basis.

121

Mr. POTTER. I think that is a very high estimate, but let me just

talk about the fact that we have down-sized. If you look at how

many people we have today versus the same period last year, you

are talking about the Federal Government growing, we are down

60,000 employees year over year.

Mr. ISSA. Look, I appreciate that. During the break I went to

Kodak. We all know who Kodak is. Kodak had a similar problem

a decade ago.

Mr. POTTER. Right.

Mr. ISSA. Film was going away faster than any projected retirement. Now, today there are—they produce state-of-the-art ink-jet

printers, they are first in digital. They are making a comeback by

reinventing themselves. It is a great thing in America when you

are carrying less paper. It is part of America’s efficiency. We should

not be fighting to try to have people move paper unless it is productive to the American economy. So we have to expect that as email replaces and videoconferencing and all kinds of other techniques replace conventional letters and documents being moved

around, that is actually good for the economy.

If the economy is moving away from your essential service in

part, at least, is faster than attrition, why haven’t you been aggressively here saying you have a growing Federal work force, we have

a shrinking need, how do we make this work? Do you need funding

to do it? Do you need education? Do you need transition? Do you

need an additional preference over and above what you have? Do

you need us to absorb the 72 percent versus 80 percent for a period

of time on the health care? What is it you need to be able to tell

me you do not have one person unnecessarily in a ready room?

Mr. POTTER. What we need is contractual flexibility. If I could

just describe, in 2001 we had $11 billion in debt. We went from $11

billion in debt until 2006 we had $2 billion in equity. It was all focused on growing the business, and we reached a peak of volume

in 2006 of $213 billion. So when you are managing a business

under that environment, we could live with contracts that literally

were developed over a 200-year period of time that the Postal Service has been in existence where we had probably too many full-time

jobs. But in a world where you could set your watch by how much

volume we were getting year to year, in a year where you had 1

percent movement high or low was a lot, that was doable. You

could create 8-hour jobs.

What has happened is, as the volume has declined we no longer

have 8-hour jobs in all locations, and we have constraints on us

that are keeping us from optimizing our work force. Some are built

into our union agreements, and we are going to fight vigorously in

negotiations this year and, if necessary, arbitration to get those

work rules fixed so that we have more flexibility in terms of the

work force, more part-time workers.

We are going to go after issues that are constraining us from

closing that gap and making the most efficient use of our employees.

I could go on forever, but we do have a very aggressive plan that

has been laid out and has been shared. It does talk about eliminating a lot of unnecessary facilities, as referred to by the GAO. It is

122

all part of the plan. That is how we are going to close a gap of $123

billion.

Some cases when we go to do that, although we have the legal

authority to do that, we are often constrained by folks betting involved and suggesting to us that we don’t do it, including some of

the folks in the Congress, and what we need is a clear path to

make that happen.

Mr. ISSA. We want to help you with that. I would just close by

saying that whether you are on this side of the dias or that side

of the dias, taking career jobs that pay real salaries, that allow

people to support homes and families, and simply saying you are

going to part-time jobs is not really acceptable from the dias. We

would like to see a plan that maximizes the amount of people who

can afford families to be supported on their salaries, and to the extent that you have alternate plans, part-time and so on, they are

certainly going to have to be supported with explaining to us how

those people don’t need a full-time job, are not looking for a fulltime job, or transitioning in your system to a full-time job. That is

the reason I opened up with talking about getting people into work

force, because I don’t think you are going to find on either side of

the dias a willingness to simply convert to full-time, home-supporting jobs to part-time jobs.

I yield back.

Mr. POTTER. If I could——

Mr. ISSA. No.

Mr. LYNCH. The Chair now recognizes the gentlelady from New

York, Mrs. Maloney, for 5 minutes.

Mrs. MALONEY. Mr. Potter is from New York, I believe, correct?

Mr. POTTER. Excuse me?

Mrs. MALONEY. Aren’t you originally from New York?

Mr. POTTER. Yes, I grew up in the Bronx.

Mrs. MALONEY. Yes. So welcome.

First of all, I would like to ask you about this payment that went

into the pension fund that was so costly, that if we could address

that in some way it would help with the budget concerns that you

have. Mr. Potter, on March 18th, just 4 weeks ago, you testified in

response to questions from Senator Durbin about the CSRS overpayments, that if the $75 billion were found you would not have

to cut the frequency of service, and you testified and I got it out

of the testimony, ‘‘it would take a lot of pressure off. If that were

to happen, we would not have to go to the 5-day delivery.’’ Is that

still your testimony, if we could get that situation with the $75 billion taken care of?

Mr. POTTER. If we got $75 billion, we would not have to go from

6-day to 5-day delivery in the short run. Long term, I believe we

are going to have to change the frequency of delivery, given the fact

that volume has been going away and will continue to decline.

Mrs. MALONEY. And, Mr. Herr, how much should the Postal

Service be paying into the retiree health benefits trust fund each

year on an actuarial basis, and how does that compare with the

current payments? Do you have that, or if you could get it to us

in writing later.

123

Mr. HERR. I would be happy to provide that in writing.

Mrs. MALONEY. OK.

[The information referred to follows:]

124

125

126

Mrs. MALONEY. And also, Mr. Herr, companies cut back on pension payments temporarily during the recession and are starting to

increase such payments now as the companies start making money.

Doesn’t that approach make sense for the Postal Service, in addition to the actuarial consideration?

Mr. HERR. I think in this case one of the things that we pointed

out in our report for consideration is looking at the health benefits

fund, and one of the things we suggest Congress consider there is

looking at the law, looking at that payment stream, and opportunities to make that more affordable.

Mrs. MALONEY. And on page 4 of your testimony, you ask Congress to permit funding of retiree health benefits in a manner comparable to what is used by the rest of the Federal Government and

the private sector, and is there any agency in the U.S. Government

that pre-funds health care, the retiree health benefits obligations?

Is there any other one that does that?

Mr. HERR. Not that I am aware of.

Mrs. MALONEY. Are there any States or municipal governments

or agencies that pre-fund retiree health benefit obligations?

Mr. HERR. I am not aware of any, ma’am.

Mrs. MALONEY. OK. And what portion of Fortune 100 companies

refund [sic] retiree health benefit obligations?

Mr. HERR. I have not done any sort of survey to determine that?

Mrs. MALONEY. Can you find out? I don’t think any of them do.

Mr. HERR. I am not aware of any.

Mrs. MALONEY. And what percentage of Fortune 1,000 companies

pre-fund retiree health benefit obligations on the accelerated schedule required of the U.S. Postal Service?

Mr. HERR. Again, I would say I am not aware of any.

Mrs. MALONEY. Well, my basic question is: why is the Postal

Service treated differently from any other agency and any other

company in the private sector? And with respect, Mr. Herr, to funding retiree health benefit obligations, you submit two broad approaches in your report. First, pay-as-you-go approach where the

premiums are paid as they are billed, and second an actuarial approach where obligations are starting in 2010 instead of 2017 as

current law provides. Is GAO advocating a particular approach as

being better than the other?

Mr. HERR. No. In this case, the pay-as-you-go table that we included was illustrative. This is actually a proposal the Postal Service made in its plan.

Mrs. MALONEY. So you prefer the pay as you go?

Mr. HERR. Well, we are not taking the position as to which one.

We know that the payments under current law are too steep. We

provided the actuarial funding approach so Congress has a sense

of what the parameters are to consider, because we realize there

are many things that would factor into that kind of decision.

Mrs. MALONEY. And, Mr. Herr, going back to your report, your

report discusses the Postal Service’s IG’s report, which alleges that

the Postal Service overpaid $75 billion in CSRS pension obligations. Do you have a position on the merits of the IG’s report?

Mr. HERR. We have taken a close look at this, and we believe

that OPM acted within its authority and the direction it was given

by the law. That law directed OPM to determine, within its discreVerDate 11-MAY-2000 14:19 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 U:\DOCS\58338.TXT KATIE PsN: KATIE
127

tion, the actuarial funding methods and assumptions by which the

Postal Service would make future payments.

The OPM statement today for this hearing has a nice overview

of the history of that.

Mrs. MALONEY. And I fail to understand why the Postal Service,

which is vital to our economy and in many ways, is treated differently than any other agency and any other private sector. I

would venture and like to see a study on cutting the Saturday delivery. I think that would hurt the economy of the postal office.

People would go to independent deliveries and their other options,

and it could undermine the ability and the finances of the post office which we are trying to protect.

My time is up, but that is a conversation I would like to continue.

I have questions, if you could get them back to the chairman in

writing so as we look at this we can look at these other alternatives, too.

And I would like an explanation why is the Postal Service treated differently than any other Federal agency.

Mr. LYNCH. Would the gentleman like to answer that very briefly?

Mr. HERR. I think it goes back to the 2006 legislation. Mr. Potter

could certainly amplify these comments, but at that time there was

‘‘found money.’’ The Postal Service had an opportunity to repay

debt and also to get ahead.

It is important to understand that the obligation for retiree

health care as estimated by OPM on this retiree health care issue

is $87.5 billion. There is currently $35 billion in the retiree health

benefits fund. That leaves a difference of about $50 billion. So part

of this is pre-funding benefits that workers and their families will

look to draw on.

Mr. LYNCH. We need to move on. I thank the gentlelady.

Mrs. MALONEY. Thank you.

Mr. LYNCH. The Chair now recognizes the gentleman from Utah,

Mr. Chaffetz, for 5 minutes.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

In rough numbers, my understanding is you are looking at a $238 billion shortfall that by moving from 6-day to 5-day delivery

the estimated savings would be somewhere between $30 and $36

billion; is that correct?

Mr. POTTER. Yes, that is correct.

Mr. CHAFFETZ. We are talking about roughly 15 percent, which

is a significant number but it is not the panacea to fix all problems.

You said something earlier that I want to make sure I heard correctly. You said that by moving from 6-day to 5-day you would not

anticipate laying off anybody who is a career Postal Service worker.

Did I hear that right?

Mr. POTTER. Yes, if we did it today. If we wait 5 years, I think

it would involve layoffs.

Mr. CHAFFETZ. Where is the savings then? Where are these billions upon billions of dollars that you save by doing that? I mean,

if labor cost is 80 percent——

Mr. POTTER. Well, it is the equivalent of 40,000 full-time equivalent employees that we are talking about eliminating the work.

128

Mr. CHAFFETZ. Right.

Mr. POTTER. And we are talking about saving on fuel——

Mr. CHAFFETZ. But you said you are not going to lay any of those

career people off. I understand the part-time folk.

Mr. POTTER. Right. Part time would go, but then, again, it is

overtime, which you are not laying anyone off.

Mr. CHAFFETZ. Right.

Mr. POTTER. Eliminating non-career jobs. That is not laying—

again, not affecting career employees. And incenting current career

employees to retire. A combination of all three I believe would put

us in a position where we would not have to lay anybody off to capture the savings.

Mr. CHAFFETZ. As this meeting concludes, if you can help flesh

that out so I can understand the math and understand how you get

to that number, I would appreciate it, further clarification.

Mr. POTTER. We would be very pleased to bring the report——

Mr. CHAFFETZ. That would be great.

Mr. POTTER [continuing]. To your office and share it with you.

Mr. CHAFFETZ. That would be great.

One of the other things I think has to obviously happen is the

closing of physical facilities. One of the challenges you obviously

face is that every Member of Congress has postal facilities in their

Districts, and I recognize the difficulty you have in trying to close

a facility and then having a Member of Congress trying to lobby

to keep it open. I, for one, plan to introduce some legislation to give

you that ability to create a BRAC-type commission, for lack of a

better word, in order to take a third-party, objective point of view

so that we can try to get rid of the politics that may occur from

the people that serve in these halls here.

Give me a sense, an idea, of how many or how big a scope this

is in terms of what you would like to do in terms of closing physical

facilities.

Mr. POTTER. Well, in terms of mail processing centers, we believe

we can move from the approximate 300 that we have today to

somewhere in the order of 150. Now, that is not to say facilities

will all close, because they serve different functions.

Mr. CHAFFETZ. Right.

Mr. POTTER. But for outgoing mail or mail that originates in a

locale, we believe we can consolidate somewhere on the order of

down to about 150 facilities from slightly over 300 today.

Mr. CHAFFETZ. What about good, old-fashioned post offices?

Mr. POTTER. Good, old-fashioned post offices, what we are talking

about there is we are not going to eliminate the physical facility

where we have delivery. I mean, we have folks who come and deliver the mail.

Mr. CHAFFETZ. Right.

Mr. POTTER. The real challenge there is how do we best provide

retail going forward, because if you look at the projections in the

future of how many folks are going to buy stamps, it is going to

go down as people pay their bills online. We think that the stamp

revenue in postal facilities is going to be down 50 percent. So our

concern is: how do you maintain those retail assets when literally

they are there to sell stamps, and stamp sales are potentially going

to go down by 50 percent? So, what we were looking at there is,

129

if the migration continues with folks buying stamps at grocery

stores and other locations, or buying online, there will be less demand in the postal lobby.

Today, 30 percent of all retail sales occur outside of a post office,

with 50 percent of those sales expected to go away because stamp

sales are going away and more people are migrating out of those

lobbies. We think thousands of post offices might be candidates to

be closed, but maintaining access to people by selling stamps at

their door.

Ideally, we would like to think of any computer in America as

a post office, and we would like to think of the letter carriers that

come to every door every day as servicing those accounts.

Mr. CHAFFETZ. If we could just address in the final seconds that

I have here the effect energy prices has on your cost structure——

Mr. POTTER. It is $8 million per penny, so you just described $8

million per penny growth in gasoline prices, so you described that

it was $2, it went to $3—$800 million.

Mr. CHAFFETZ. Thank you. Thank you, Mr. Chairman.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from Ohio, Mr.

Kucinich, for 5 minutes.

Mr. KUCINICH. Mr. Chairman, members of the committee, in the

analysis that GAO did, they talk about the declines in revenue due

to economic downturn, changing use of mail, link to continuing

shift to electronic communications, and payments. One of the

things that I think the Postal Service has not been mindful of, and

certainly GAO doesn’t seem to have a fluency with is the problem

of people who are on the other side of the digital divide, people who

don’t have access to the Internet, people who aren’t skilled in using

electronic payments over the Internet, people who don’t do electronic banking, because we have constituencies. I would think that

they would tend to be people in lower socio-economic scale, but they

also might be people who are elderly, who don’t have the fluency

with the Internet.

The whole idea of universal service means universal without respect to age, to income, to race, or to any other indices that you

might use as a society. Members of this committee, we are actually

looking at dismantling universal access.

I want to give you some ideas of how they are doing it. Look in

your neighborhoods. Taking mailboxes out of a neighborhood, now

for some people that might not seem like a big deal, but suppose

you are used to moving the mail from your house to the post office

by walking, walking to a mailbox. Mailboxes by the thousands have

been removed from communities. Nobody talked to any Members of

Congress, I can promise you that. They didn’t ask for any of our

opinions whether you move a mailbox out.

So then you go to closing post offices. That is the next part of

the infrastructure. Then the next step after that is want to talk

about doing away with Saturday delivery.

There are FedEx boxes outside of some U.S. Postal Service facilities. The post office, one of their recommendations that I see being

made here, is to move to grocery stores and other retail locations,

post office operations.

130

Mr. Potter, have you ever had any discussions, you or members

of your staff, or did you have any communications or memoranda

or e-mails with respect to talks that you have had with individuals

regarding subsequent privatization of post office services, any communication of any kind whatsoever?

Mr. POTTER. As part of our analysis that was done by McKenzie

and Co., they did an analysis of whether or not privatization made

sense. Their conclusion was that it did not. It is part of the report.

Basically, the reason that they said that was that if somebody were

to come in and want to take over the Postal Service, that they

would want to have a pathway to profit, and the only pathway to

profit would be to deal with legacy costs, allow freedom regarding

frequency of delivery, and retail outlets. And they concluded that

they would even have to go further than what we are proposing in

terms of the changes that are out there.

Mr. KUCINICH. That is the McKenzie study.

Mr. POTTER. Yes, sir.

Mr. KUCINICH. But it wouldn’t be unusual to have legacy costs

dumped on the Government and then have the private sector cherry pick the profits.

Mr. POTTER. Sir, I am not a proponent of that at all. I am saying

that we are not proposing privatization. What we are trying to do

is preserve——

Mr. KUCINICH. You didn’t answer my question. Aside from

McKenzie, have you had any meetings with anyone saying, Oh, you

are going to let go of Saturday delivery, well, we will fill the gap?

Mr. POTTER. No.

Mr. KUCINICH. Really?

Mr. POTTER. Really.

Mr. KUCINICH. No one on your staff at all?

Mr. POTTER. I don’t know. I can only speak for myself. I am not

aware of any.

Mr. KUCINICH. And that means that you are really not anticipating then anyone else picking up the slack if you do away with Saturday delivery?

Mr. POTTER. I don’t believe the economics are there to do it, and

I look at the competition in the package arena and I look at what

they charge for Saturday delivery, and they put a premium on Saturday delivery. The lowest price I saw is an additional $12.50 per

piece.

Mr. KUCINICH. I will submit some followup questions in writing.

I thank you.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from Missouri, Mr.

Luetkemeyer, for 5 minutes.

Mr. LUETKEMEYER. Thank you, Mr. Chairman.

Gentlemen, as we were going through this this morning and we

are talking about reducing service, have you had any sort of cost/

benefit analysis done, or have you looked into what it is going to

cost individuals and businesses if you cut back on your delivery

service at all?

Mr. POTTER. We have made inquiries of our customers and we

have been talking on a regular basis with our customers. The bulk

of our major customers have said that they can make this change

131

and make adjustments to the way their businesses operate and adjust to a 5-day delivery. There are some customers who simply will

not be able to make a change, and probably the most obvious example is newspaper delivery, generally in rural areas where they have

6-day newspaper. Obviously, if we are not delivering on Saturday,

we don’t have a business solution for them. But there have been

ongoing dialog with businesses. We probably would have saved well

over $3.5 billion had it not been for adjustments that were made

in our plan to accommodate businesses in terms of frequency of delivery.

Mr. LUETKEMEYER. OK. I am just curious about that, because I

know we may be cutting our nose off to spite our face here if we

wind up incurring more costs as a society as a result of what you

are proposing here. I mean, there is another cost that is going to

be passed along to the consumer if the businesses have to absorb

additional costs as a result of the lack of mail service for an additional day.

Mr. POTTER. Well, one of the reasons—I mean, there is a fine

balance here between service and cost.

Mr. LUETKEMEYER. Right.

Mr. POTTER. And so the pathway to addressing cost, unfortunately will affect service.

Mr. LUETKEMEYER. Right.

Mr. POTTER. We do want to preserve universal service for all of

America, and one way to do it is to reduce the frequency——

Mr. LUETKEMEYER. Right.

Mr. POTTER [continuing]. And keep rates affordable. And so trying to find that balance is very difficult.

Mr. LUETKEMEYER. To followup on a comment of the gentleman,

Mr. Kucinich, my concern also is along the lines that if you do

away with the 6th day somebody else will step in, provide that

service, or cherry pick those areas that they can provide service

and make money on that service delivery and then, at the end of

the day, by allowing them to sort of get their nose into the business, suddenly whittle away at the rest of the Postal Service business. Is that a possibility?

Mr. POTTER. I don’t believe so, sir, but, again, the competition, the main competition, charges a $12.50 premium per piece that is

delivered on Saturday. We have a declining business. The fact that

we still have a 5-day network, I think makes us extremely strong,

and we are very efficient when it comes to the handling of mail.

Mr. LUETKEMEYER. Well, you use the FedEx and UPS folks, and

they provide a similar delivery service of packages, so therefore

they have already cherry picked out part of your business. It would

seem to me that it would make sense that if you gave up part of

the business somebody would fill a void there on part of it that can

actually make money, and before long they wind up expanding that

service to all 5 days rather than just the 6th day.

Mr. POTTER. I am not going to say——

Mr. LUETKEMEYER. I just point that out as a concern.

Mr. POTTER. I am not going to say there is no risk, but I think

the risk is minimal.

Mr. LUETKEMEYER. Yes. In your testimony here both of you, Mr.

Herr and Mr. Potter, both talked about expanded products and

132

services, and you mentioned one, I think, Mr. Herr, with regards

to the new box that whatever fits in, one price and off it goes. That

is a neat concept and it works very well, apparently.

What other products and services do you have in the pipeline or

considering or things that may be on the horizon for us here?

Mr. POTTER. Well, I will give you one example that we just

shared with a convention that we had down in Nashville this week.

We are entering into an agreement with Hallmark that they will

sell prepaid envelopes for their greeting cards, so it will be one-stop

shop. You buy the card, you are buying the prepaid envelope at the

same time. We are using an intelligent mail bar code, which is a

new code that we have been deploying to help us with the accounting of that process. So that is an example of just trying to bring

added convenience to the customer base.

Mr. LUETKEMEYER. That is interesting.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from Virginia, Mr.

Connolly, for 5 minutes.

Mr. CONNOLLY. I thank the Chair and I thank both of our panelists for being here this morning.

Mr. Chairman, I will, with your permission, enter my full statement into the record, but I must say, I continue to be bothered by

the fact that the approach to trying to deal with the issues of solvency and long-term viability of the Postal Service continue to be

ad hoc. I must confess to some disappointment in the GAO report,

in particular, that we are not looking at a more comprehensive new

business model approach. Ad hoc cuts to delivery service may save

money in the short run, at long-term cost in terms of customer

base. I think Mr. Chaffetz raised some very legitimate concerns

about going from 6 to 5 days a week.

I would note with historical interest that this discussion occurred

in 1976, where a similar situation was faced and the Postal Service

again said if we don’t go from 6 to 5 we will never make it, and

subsequently, of course, the Postal Service actually experienced

some record profits without cutting service from 6 to 5 days.

I would like to ask the GAO rep, we keep on talking about this

$238 billion in cumulative losses, and I bring to your attention the

thoughtful testimony of CRS which says you have to look behind

that number. First, there are certain assumptions made about

what will or will not happen in terms of economic growth and customer base for $238 billion. Second, you would have to ignore the

statute that says there is a statutory debt limit actually in USPS,

and then you would have to assume Congress does absolutely nothing for 10 years and that you would borrow $231 billion from the

U.S. Treasury.

That is a little hard to believe, so I am a little concerned that

in bandying about this $238 billion number we are ignoring some

obvious things that are going to happen, and it looks, frankly, a little bit like a scare tactic to get us to make some decision that may

or may not be popular. And they may, in fact, be viable decisions,

but how real really is that $238 billion number? And would you

care to respond directly to the Congressional Research Service report, page 11, that lays out the flaws in this $238 billion?

133

Mr. HERR. I appreciate the question. In looking at that number,

we realize that is the number that says if nothing else changes. I

agree, things will change. There is attrition that is expected. Given

the drop in volume and revenue, the idea that the Postal Service

would be self-financing, one would expect that number was probably by far the worst-case scenario.

It is the number that is put out there to provide some context

for what happens if nothing were to change, but it is understood

that things would have to change in the interim.

Mr. CONNOLLY. And we would do nothing for 10 years.

Mr. HERR. I would assume that would not be the case.

Mr. CONNOLLY. Right. So how real then is the $238 billion number that has been bandied about in testimony here and in the press

and—I mean, one begins to conclude it has no basis in fact at all,

other than to scare people.

Mr. HERR. Well, I think that it is a starting point. I mean, again,

this is a number that the Postal Service came up with, but it is,

I think, to provide an illustrative case of not doing anything. And

if nothing is done, then you will face those kind of challenges.

Mr. CONNOLLY. Could I ask Postmaster General Potter to respond to that?

Mr. POTTER. Well, I agree with what he just said. It is what hap- pens if nothing is done. We did lay out a way of closing $123 billion

of that gap, and, again, through aggressive management, focus on

productivity. There is an element of growth that is built into that

$123 billion. However, there is a sizable gap beyond that.

Mr. CONNOLLY. Can I interrupt you for just 1 second there, Mr.

Postmaster General, because you make a very good point. You

would have to assume, for $238 billion to be real, we do nothing,

including you. You already said you are going to use the authority

you have to make reductions totaling $123 billion; is that correct?

Mr. POTTER. That is correct.

Mr. CONNOLLY. So the $238 billion number is already not real.

Mr. POTTER. It is a theoretical number.

Mr. CONNOLLY. A theoretical number. Except that you have already announced here you are taking steps to make sure that theoretical number is never real.

Mr. POTTER. Exactly.

Mr. CONNOLLY. Thank you.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentleman from Indiana, Mr. Burton, for 5 minutes.

Mr. BURTON. General Potter, it is good seeing you again.

Mr. POTTER. Good to see you, Mr. Burton.

Mr. BURTON. You have been there for a while and you have done

a good job, and I really don’t envy the position that you guys are

in right now, because with the Internet and everything it has to

be a real problem.

Mr. POTTER. Well, I don’t envy the Federal Government, either,

so you have a tough job, yourself.

Mr. BURTON. Neither do I.

According to Congressional Research Service testimony, the Postal Service has reduced its post office inventory by slightly over 15

percent since 1970, and I assume that these facilities were closed

134

for reasons other than or in addition to profitability. Last year, you

began to review stations and branches which the Postal Service

maintains that is not subject to the same legal hurdles that post

offices. In the absence of these legal hurdles, how many branches

have you shuttered, how many will you close, or are you still in

study mode? And this is the question: it is my understanding that

the Postal Regulatory Commission estimates that closing all small

and rural post offices will yield savings of about 7/10 of 1 percent

of your operating budget. That doesn’t sound like very much. Is

that going to make a big impact?

Mr. POTTER. Let me try to answer all those questions.

First, from stations and branches, we did have a national review

of stations and branches. Our local offices have made recommendations for changes. Subsequent to that, we received the advisory

opinion of the Postal Regulatory Commission and we also completed our analysis on the plan that we submitted to you as part

of my testimony. We are in the process of reviewing those recommendations in light of the Postal Regulatory Commission’s suggestions, as well as to make sure that we are aligned with our plan

to assure that there is access, that we don’t close anything without

assuring that the community has access. So far we have closed

none. OK?

Regarding post offices, I think there is an assumption that if,

post offices were under review nationwide, that somehow small

post office would be the target of the change, and I will just tell

you that Canada embarked on a review of their post offices to determine where they had alternate access in light of some of the

challenges that we similarly face. They would close offices where

there was no access. Much to their own surprise, what they found

out was that many of the rural post offices ended up having to remain open because of the fact that there was no alternative access

in many of those communities.

So it is a matter of we don’t have a plan to abandon any community. We recognize universal service. The question is: how can that

best be provided? And if finding a location that is open 7 days a

week and 14 hours a day or more, if that provides better access to

a community than a post office that has more restricted hours,

then that is the choice that will be made.

So, again, I think that a lot of people rush to judgment about

what the outcome of the process will be, and we have not embarked

on it. But no, there is no one back in postal headquarters saying

this is the community and we are going to wipe these out; it is

going to be a matter of a process and it is going to take a lot of

time.

Mr. BURTON. So I presume we will see you back here after you

go through your study and make your decisions?

Mr. POTTER. Right. And I think it will evolve over time, and it

will be on a community-by-community basis.

Mr. BURTON. OK.

Mr. POTTER. It is not going to be made at a national level. We

don’t know what is going on in the State of Washington or in Florida. Our local managers know best what is down there.

Mr. BURTON. OK. I think Mrs. Maloney asked this question. I

don’t think she is here now. But I think you said a 1-year fix was

135

supposed to fix the problem that we might be facing as far as going

to 5-day delivery service from 6 days. What happened?

Mr. POTTER. Well, just let me see if I can clarify. one of the

things that we believe was that we over-funded the Civil Service

Retirement System pension fund. We believed that back in 2003

when the law was changed that declared that we were over-funded

by $17 billion. At the time, the Postal Service felt that it was overfunded by over $100 billion, and we appealed to the Board of Actuaries at OPM, and they said no, that the way OPM did their analysis was correct.

The 2006 law, Congress added a provision that enabled the Postal Service to appeal to the Postal Regulatory Commission to have

an actuary review that decision. We have made that appeal, and

I believe the Postal Regulatory Commission is reviewing that.

Should a decision be made that would benefit us in terms of that

split that occurred back in 1971 over who paid for what, then we

would use some of those funds to delay moving from 6 to 5-day delivery.

Mr. BURTON. Mr. Chairman, could I one more real quick question?

I would like to ask this question of Mr. Herr. I think GAO has

recommended that the pre-funding be continued at the Postal Service. I would just like to know, if GAO had to do pre-funding, how

much would that cost?

Mr. HERR. What it would cost GAO as an agency?

Mr. BURTON. Yes.

Mr. HERR. I haven’t done that analysis.

Mr. BURTON. Well, I am just curious, because you have recommended that the Postal Service be pre-funded, and a lot of people agree with that, but we don’t do that with any other agency of

Government. I would like to know how much it would cost. If you

could give us that for the record, I really would appreciate it.

Mr. HERR. I can ask our financial office to see if they can put

that number together.

Mr. BURTON. Thank you, sir.

[The information referred to follows:]

136

137

138

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the distinguished gentleman from Illinois, Mr. Davis, for 5 minutes.

Mr. DAVIS. Thank you very much, Mr. Chairman. I want to

thank you for calling the hearing. I certainly want to thank the

witnesses for appearing.

Actually, I want to commend Mr. Potter and his management

team, along with the stakeholders and unions, for holding together

a system that I think we have sort of been asleep a little bit with.

I noticed that Mr. Connolly is not here, the gentleman from Virginia, but I think he makes a very astute observation, and that is

that there has been some negligence in terms of planning for this

day, and sort of knowing that it was going to come. Someone reminded me when I was in undergraduate school and my advisor

had me take 10 hours of German, and I should have been taking

10 hours of Spanish, and I am sure that he meant well. I mean,

he had his rationale and he had his motivation for doing it. And

I am sure that some of the approaches that we have taken, we

have meant well, but I think we had to kind of know that we were

moving in the direction just with the change in environment, the

change in economies, and the changing of time, that we would be

at this juncture.

Mr. Potter, let me ask you, if we were to refund or transfer the

overpayment, and I guess the idea is that this would give us some

breathing room to try and search for more long-term solutions, how

much time, or do you have any projection relative to how much

time that might provide us with?

Mr. POTTER. Depending on what was done with the money, we

have kind of examined what we would do. I think it gives us a 5-

year window, assuming that we could take the moneys, pay down

our debt, the debt that we have now, assure that we fully fund

CSRS, because there is a potential $10 billion there that there

might be a gap, and then use the funds to pre-pay the retiree

health benefit trust fund payments that are due in the next 5

years. I think it could cover that gap, but I think at that point in

time we would be sitting down again talking about how we effect

the changes that we have laid out in our plan.

Mr. DAVIS. Well, let me just say that for this one Member, that

sounds like a very rational approach to me, that there are no simple solutions to very complex problems and circumstances, and obviously it is going to take a tremendous amount of understanding,

negotiation. I think we have all of the stakeholders that we want

to try and keep in business. We certainly want to recognize the

problems and workplace concerns of the men and women who actually process and deliver the mail. And so I think that this is an approach that we certainly need to be pursuing.

Mr. Herr, let me ask you: what does high risk mean to the Government Accountability Office?

Mr. HERR. Congressman Davis, GAO has a list of about 30 agencies that are high risk in different areas. In the case of the Postal

Service, we refer to the high risk in the sense of the financial condition of the Postal Service, and by that we are referring to the

idea that Congress suggested the Postal Service be self-sufficient;

that is, to have revenues to cover its cost.

139

It became clear last summer that was very much at risk, given

the decline in mail volume, the decline in revenues, and then what

that meant for their business model in terms of their operations.

Mr. DAVIS. And so, if I were to translate that into layman terminology, it would mean that something has to be done.

Mr. HERR. Yes.

Mr. DAVIS. Otherwise, things are going to get worse.

Mr. HERR. Well, yes. You could say that is a good way to put it.

Mr. DAVIS. And, finally, let me just ask you, you did mention

that we need to re-examine our structure for collective

bargaining——

Mr. HERR. Right.

Mr. DAVIS [continuing]. With the management of the Postal Service and the unions. Could you kind of amplify that a bit?

Mr. HERR. Yes. Part of that is the thinking that—they go into

union negotiations this year—if something goes to binding arbitration, simply that the financial condition of the Postal Service is

taken into consideration so that there is the possibility that whatever agreement is reached through that process, that it is going to

be one that can be sustained going forward.

Mr. DAVIS. Thank you very much, gentlemen.

Mr. Chairman, thank you. I yield back the balance of my time.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentlelady from California, Ms.

Chu, for 5 minutes.

Ms. CHU. Mr. Potter, on the 5-day delivery question, my issue is:

once we go down this road where does it all end? It is my understanding that once the language requiring 6-day delivery is repealed, there would be no legal barrier to prevent the Postal Service from reducing delivery days further from 5 days to 4 days or

a 3-day delivery. Certainly, we have seen postage stamps increase

with alarming frequency, more and more so. For me it is even hard

to remember what the last postage stamp rate was.

On delivery issues, Business Week Magazine called on the Postal

Service to shift immediately to 3-day delivery within days of the

Postal Service’s announcement of its action plan. Of course, that

would be really alarming. It would destroy half our jobs, but also

likely lead to a death spiral for the Postal Service, with less service

leading to less mail volume leading to less service and so on.

So, Mr. Potter, what guarantees, if any, would postal workers

and the American people receive that there would not be further

reductions in delivery days?

Mr. POTTER. Let me just say, Congresswoman, that we did look

and try to look out into the future, and what we did do was build

a 10-year plan, and so our plan is suggesting that, assuming that

there were a broad array of opportunities to close the financial gap,

that is all we would have to do in the next 10 years is move from

6 to 5. However, we haven’t looked beyond that. In fact, there are

many folks who are saying that our estimate of 150 billion pieces

of mail in 2020 is optimistic. I hope it is not. We are going to work

hard to try and beat that plan, that forecast, but there are no assurances beyond the next decade. I think it is going to be a function of America’s use of the mail.

140

When you think about that, I look at the Postal Service. We are

mailing less than we had in the past. The Federal Government is

mailing less than they have in the past. Most businesses in America are mailing less mail, and most Americans are mailing less.

Going forward, we think that trend is going to continue, so it

does create a very complex situation for us and for everybody. How

do you match our use of resources with the revenues that we are

going to take in?

Ms. CHU. My other question is whether switching to a 5-day delivery week would actually accelerate the loss of customers, because letters mailed on Friday night would not be picked up until

Monday morning or Monday afternoon. Less frequent delivery is

going to accelerate the shift to electronic invoicing. Booming businesses like mail order prescriptions would be threatened because

they count on Saturday delivery. They might go over to FedEx or

UPS. And as they open accounts and become more comfortable

with these other services, they would start to use the Postal Services less. So it seems that Saturday delivery is the Postal Service’s

key strategic advantage over its private competitors over UPS and

FedEx and gives away one of the more important comparative advantages in the one area of the postal market that is likely to grow

when the economy recovers.

So over time the loss of revenues could outweigh the short-term

savings, so how is the Postal Service going to make up for those

lost customers?

Mr. POTTER. What is very interesting, I went around the country

and talked to a lot of CEOs and others who are in business. When

you sit down and you talk to them and you say—for example, you

mentioned DVD rentals. You sit down and you talk to those folks,

what is your ideal business model for in the next decade? And their

business model would be out of the mail. They would do downloads

to a box that people have in their home. So their long-term business model is to move away from the mail.

Likewise, when you look at bill presentment and bill payment,

the ideal model for these folks is to have 100 percent of bills presented online and 100 percent of bills paid, through online. They

recognize that America is in a state of transition, that they are

never going to get to 100 percent, and so they need the Postal Service to support their transition into a future state.

The real challenge for all of us is how does the Postal Service

change as America changes, and that is what our plan presented,

was the fact that we have to be realistic about what is happening

going forward, and a lot of folks, Congressman Davis and Congressman Chaffetz, have talked about the fact that we really need to be

thinking about the future and designing a plan to move in that direction, and that is what we attempted to do with our plan. It is

balanced. Literally everybody is affected by what we did. Nothing

in it is easy. It is all hard decisions that had to be made, and so

it is best that we could do in terms of trying to come up with something that we think was fair and affects people in a moderate way.

Ms. CHU. Thank you. I yield back.

Mr. LYNCH. I thank the gentlelady.

The Chair now recognizes the gentlelady from California, Ms.

Speier, for 5 minutes.

141

Ms. SPEIER. Thank you, Mr. Chairman.

Thank you, gentlemen, for your participation this morning.

To you, Postmaster General, let me ask you, in your opening

comments you referenced that one of the things you could do was

create incentives for early retirement. Are you seriously thinking

about that? And if so, what would that look like?

Mr. POTTER. We have already done that for the two unions where

we had excess employees, and we incented with folks who are eligible to retire, we provided an early out for those who were within

5 years of retirement as part of that effort, and two $7,500 payments, one the day they retired and then one a year later.

For other unions we haven’t offered it because we actually are

in a position where we need the employees that we currently have,

and so down-sizing makes no sense when you need the folks that

you have. Why pay people to go just——

Ms. SPEIER. So even with management now you are not looking

at any incentives for early retirement?

Mr. POTTER. There is no economic justification to do that right

now.

Ms. SPEIER. OK. Let me move on to another line of questioning.

Of the 150 billion pieces of mail, how much is direct mail?

Mr. POTTER. How much will be?

Ms. SPEIER. Or how much will be, if that is a future figure.

Mr. POTTER. I believe it is 57 percent.

Ms. SPEIER. So 57 percent is direct mail. Are you losing money

on catalog delivery now?

Mr. POTTER. We are not covering our costs on some catalog delivery.

Ms. SPEIER. So wouldn’t that suggest that you have to increase

the cost?

Mr. POTTER. The price?

Ms. SPEIER. Yes.

Mr. POTTER. Yes.

Ms. SPEIER. The cost to the catalog company?

Mr. POTTER. Well, there is two ways of addressing it. One is to

try and take cost out of our system to try and bring our cost in line

with what people pay, as well as raise the price to bring it in line.

Ms. SPEIER. So how much are you losing money? Is it $100 mil- lion? Is it $10 million?

Mr. POTTER. It depends on what category of mail it is, but there

are several types of mail that are not covering their cost.

Ms. SPEIER. I am talking about catalog mail in particular.

Mr. POTTER. I can provide that for the record.

Ms. SPEIER. All right.

Mr. POTTER. I don’t know it off the top of my head.

Ms. SPEIER. Would you do that, then?

[The information referred to follows:]

142

143

Ms. SPEIER. Have you looked at other countries and how they are

dealing with what have to be similar issues around their Postal

Service?

Mr. POTTER. Yes. In Germany they charge 80 cents for a stamp.

In Canada they have gone from 6-day delivery to 5-day delivery.

The same in Australia. But generally if you look around the world,

we have the lowest price stamp, lowest price postage in the world

for developed countries.

In addition to that, they are starting to look at things that we

have done to grow volume, so they are looking at advertising mail,

they are looking at things like opening up their network to allow

people to bring mail into their system at different levels. We are

the largest post in the world. We deliver over 40 percent of the

world’s mail. We are the most open post in the world in terms of

providing users of the mail access at all levels, not just at origin,

but you can bring mail to destination and pay a rate, you can bring

mail to the delivery unit and pay an even lower rate.

The key to our business model has been volume. We have a business model that was built on volume. It worked tremendously

for——

Ms. SPEIER. But that is not what our business model is going to

be moving forward.

Mr. POTTER. It can’t be moving forward because volume is going

away because of electronic——

Ms. SPEIER. All right. I have one major question. I apologize to

Chairwoman Goldway for stealing her thunder a little bit, but in

her testimony that she will be making later, she says: in the Postal

Service plan, regrettably there is no growth, no rejuvenation, and

little innovation. It sounds to me that if we are going to continue

to have a Postal Service that is viable, there are lots of changes

that have to take place. Probably the most important change is one

around innovation, whether it is electrifying your vehicles or looking at derivatives in terms of protecting yourself against the increased cost of gasoline.

Mr. POTTER. [Laughing.]

Ms. SPEIER. No, I am serious. I mean, you are an end user, just

like the airlines are an end user for gasoline. They use derivatives

to protect themselves against the cost of gasoline or petroleum from

going up. I mean, I think we have to look at the entity differently.

Whether or not you should be able to actually contract with catalog

companies to provide better rates for the volume of shipping that

is going on, because if online purchasing is going to be a thing of

the future, then your shipping function is going to be far greater

than the envelope.

I think the innovation is where we are lacking right now, and I

would encourage you in the future to look at that.

My time has expired.

Mr. POTTER. Well, regarding derivatives, we will follow the lead

of the Federal Government. You buy a lot of gasoline, as well.

Mr. LYNCH. As I understand, the post office is also paying State

gas tax; is that correct?

Mr. POTTER. No.

Mr. LYNCH. You are not?

Mr. POTTER. No.

144

Mr. LYNCH. OK. The Chair recognizes Mr. Clay from Missouri for

5 minutes.

Mr. CLAY. Thank you, Mr. Chairman. Let me thank you for holding this important hearing to address the essential issue of securing the future of the U.S. Postal Service.

We have all watched the Service suffer under the strain of unprecedented financial loss, and it is clear that a myriad of solutions

are necessary.

I want to take this opportunity to urge all of my colleagues to

continue to assess this matter and challenge us to move past controversy to find real and helpful solutions.

With that, let me ask Mr. Potter, according to a summary of your

report, the Postal Service rejected cost-cutting alternatives like centralized boxes. Can you tell us about the customer polling and

other research that was used to reach this conclusion?

Mr. POTTER. Yes. We went out and surveyed customers.

McKenzie and Co. surveyed a broad array, a statistically representative sample of America, and asked them a number of questions

around alternatives that the Postal Service has to reduce cost. One

of them was to take the mailbox from your door and move it to a

street corner cluster box which exists in many communities around

the country. Newer communities are serviced that way. Over 90

percent of those surveyed said that would be the worst thing that

the Postal Service could do in terms of the array of options that

was in front of them. They said that would be, in their minds, the

biggest degradation to service.

For example, they looked at 6 to 5-day delivery. Every survey I

have seen, two-thirds of the respondents say that they would be

OK with that. But on the other side, in this case 90 percent said

absolutely not. That would be a big diminution of service. That is

why we pulled that option off the table. It is worth a couple of billion dollars in savings, but if the American people don’t want it, we

don’t want to go down that path.

Mr. CLAY. OK. Another of these rejected proposals was to offer

services besides mail at offices and branch locations. It seems to me

that expanding your product and services would make the post office a kind of one-stop shop for customers that would increase revenue. Do you agree with that assessment?

Mr. POTTER. Congressman, we want as much freedom as we possibly can get in the law to look at options to do things outside of

what the current law says. In 2006, the PAEA was passed, and it

was extremely and is extremely restrictive regarding what the

Postal Service can do. Basically, it sells stamps, delivers mail, and

engages in the package business. We think there are other opportunities for us to generate revenue, and we would like to have the

ability to study that.

Mr. CLAY. And so if you were to change to expand your products

and services, what short- and long-term effect would this change

have on the Service?

Mr. POTTER. Short term, probably none because one of the things

that we did as part of our study was look at whether or not we

should be asking to specifically get into other types of businesses

that posts around the world are in, like banking, and some folks

sell cell phones and other things. What we concluded was that any

145

business you might want to get into has a certain amount of risk

and would require capital investment. Given our financial situation, we are not in a position to take risk, nor do we have the capital to invest. But we would like to have the freedom to study these

and perhaps, when we are in better shape, to begin to explore these

other options.

In the meantime, we certainly would like to consider anything

we could do at a post office to serve the Federal Government, because we are—if you think about it, 37,000 outlets for the Federal

Government, and we today do passports. If there are other things

that we could do, we would certainly want to get engaged to do so.

Mr. CLAY. OK. On the 6-day versus 5-day, can you give me a

quick breakdown, basic breakdown on how much this would save?

Mr. POTTER. It will save $3 billion per year, and that will grow,

obviously, as inflation in terms of some fuel costs and employee

costs go on. So I think if you looked at it 10 years from now, it

would be worth over $4 billion.

Mr. CLAY. OK. Final question. Mrs. Maloney noted that you were

from the Bronx. Does that make you a Yankee fan or a Mets fan?

[Laughter.]

Mr. POTTER. Yankees, of course.

Mr. LYNCH. Very good. The Chair recognizes the gentleman from

Massachusetts, Mr. Tierney, for 5 minutes.

Mr. TIERNEY. Thank you, Mr. Chairman.

I thank our witnesses for being here today with us.

Can you tell me how much of the U.S. taxpayers’ money now

goes in annually to the Postal Service?

Mr. POTTER. We do get about $100 million for services that are

provided, but other than that there is no subsidy. Zero.

Mr. TIERNEY. The customer. You get money for them being a customer?

Mr. POTTER. Excuse me?

Mr. TIERNEY. You get the $100 million because they are a customer? You get it for services that you provide to the Government?

Mr. POTTER. Yes. For example, we have to provide free matter

for the blind that moves through the mail, and we provide free

overseas voting. Those are the two things, the services we provide

where we are compensated for them.

Mr. TIERNEY. And other than that, not a dime of taxpayer

money?

Mr. POTTER. Exactly.

Mr. TIERNEY. So I don’t want to pick a nit with you here or anything like that, but you generally refer to the American people and

you survey the American people. You are really surveying your customer base on that?

Mr. POTTER. Exactly.

Mr. TIERNEY. Can you tell me, from your studies, your work on

it, do you think there is a social value to what the Postal Service

does to the public, in general, in any sense of the way?

Mr. POTTER. Without a doubt. Every week I probably sign five

or six letters to employees who do things that we never get any recognition for in terms of being the eyes and ears of a Government

entity in local communities, whether that is saving people in a

146

burning building or alerting people, the local police, that there is

a crime being committed. It is amazing what we can do there.

Mr. TIERNEY. I agree with you. Even aside from that, just in the

every day delivery and performance of your mail, do you think

there is a social benefit to the general public to the service that you

provide?

Mr. POTTER. Yes.

Mr. TIERNEY. Could you give me a couple examples of what you

think those are?

Mr. POTTER. Well, I think just the fact that there are a lot of people who are shut-ins, and the fact that they get mail every day is

their connection to the outside world. I also know that we carry a

lot of mail for our nonprofit organizations and that we are the main

conduit to raise moneys for charitable organizations throughout the

country. So if that conduit gets shut off, I think a lot of people are

negatively harmed.

Mr. TIERNEY. Mr. Herr, do you agree with that? Do you have any

additional thoughts on that?

Mr. HERR. I would agree. I think that your question gets in part

to the issue raised by Congressman Kucinich about the social value

of the mail and providing services to folks who are on the other

side of that digital divide.

Mr. TIERNEY. So let me ask you: if we don’t make these changes

and things keep going downhill, what we are really looking at at

some point is some privatization of this? And if a private company

were to take over this responsibility, would it be fair to say that

we could expect that you wouldn’t get mail, necessarily delivered

to your doorstep?

Mr. POTTER. That is an option that they would pursue, yes.

Mr. TIERNEY. You can bet that the prices would go up significantly?

Mr. POTTER. I would think so, other than in some local—in rural

areas and suburban areas, without a doubt.

Mr. TIERNEY. And you could bet that some areas wouldn’t get

served at all, correct?

Mr. POTTER. Yes.

Mr. TIERNEY. As a business decision, you may not bring it out

to the person that is living in an area that is difficult.

Mr. POTTER. Certainly that is an option that would exist, so universal service would be threatened.

Mr. TIERNEY. OK. So in all of your business planning and your

assessments on that, did anybody take into account some contribution from the taxpayer for the return of all the benefits that they

get from having universal service through the Postal Service?

Mr. POTTER. No, we did not. We are not proposing that, but that

is certainly an option that you folks, folks in the Congress, could

consider.

Mr. TIERNEY. Well, it would have been nice if somebody had

studied that. You had all these fancy people, Boston, whatever, I

forget the names of the firms, proposing ways to privatize and otherwise do things. It would have been nice if somebody could have

taken that aspect and put a value to that and then talk about that.

Is that something you might consider doing?

147

Mr. POTTER. Well, we have put a value on universal service,

which is something that was built into the additional law. There

was a provision in the original law back in 1971 for the Postal

Service to receive compensation because of the fact that we provide

universals service at a loss in some cases to different locales in the

country. We put a price tag on that of about $4 billion, and it was

done recently. We could share that data with you.

Mr. TIERNEY. And do you ever get the $4 billion?

Mr. POTTER. No.

Mr. TIERNEY. And if you updated what the value is in today’s

present cost——

Mr. POTTER. That is what it is. It had been——

Mr. TIERNEY. A smaller amount?

Mr. POTTER [continuing]. A smaller amount. And now, in today’s dollars, it is, like, $4.5 billion, but I will get the exact number for

you.

Mr. TIERNEY. Is that an annual value?

Mr. POTTER. Annual. Annual number.

[The information referred to follows:]

148

149

150

Mr. POTTER. If I could just go back a little bit historically, prior

to 1970 the Postal Service, 20 percent of the Postal Service was

provided for by appropriations, and every year coming up and asking for money became problematic.

Mr. TIERNEY. I know.

Mr. POTTER. And the Postal Service ended up in a very poor condition in the late 1960’s because of the difficulty in getting appropriations. That is why we have been reluctant to ask for it.

Mr. TIERNEY. I remember reading it in Washington. And I know

sometimes people don’t appreciate the value until they lose it, but

80 cents delivery of an envelope might get people’s attention.

Mr. POTTER. I think we would lose a lot of mail, though, and a

lot of jobs.

Mr. TIERNEY. I think you would.

Thank you, Mr. Chairman. Thank you for your comments.

Mr. LYNCH. I thank the gentleman.

The Chair now recognizes the gentlelady from California, Ms.

Watson, for 5 minutes.

Ms. WATSON. I would like to thank the Chair for this hearing

and the witnesses for your time and patience. I will direct this to

Postmaster Potter.

One of the changes mentioned in the Postal Service’s action plan

for the future is to create a more flexible work force. While the report states that a leaner organization can be achieved through attrition, as a large number of your employees are expected to retire

in the coming years, the report advocates replacing retirees with

part-time workers. This concerns me, because part-time work often

results in under-employment, where people do not have the opportunity to make a living wage or to receive certain benefits. The

Postal Service has a very personal appeal to me because my mother

worked there for 34 years, and I worked in the post office in Los

Angeles for 7 years, myself, and got through college because of it,

and the rest is evident in the successes I have had.

But what percentage of the work force do you envision employing

part time, and how will the Postal Service ensure that these workers are fairly compensated for their work? And will part-time workers still be able to participate in collective bargaining processes?

Mr. POTTER. First of all, I share your experience, because I was

a clerk and worked my way through the Postal Service, so we share

that background.

Regarding part-time, we would want to maximize to the fullest

extent possible the number of full-time employees that we have.

That is No. 1. We are not talking about abandoning that. We want

to maximize full-time employees. However, when you look at our

processing centers, we now have machines that process mail at

30,000 pieces an hour. When you look at those jobs, they are not

8-hour jobs. They might be 6-hour jobs. And, by the way, when we

say part-time, that is not a euphemism for non-career employees.

We are talking about people who might have career jobs but might

work 6 days a week, 6 hours a day, as opposed to working 8-hour

days, not because we have a preference for 6 over 8, but the work

would drive you to have a person working 6.

One of the things that we have done is consolidated tours. I don’t

know if you worked in the plant, but we have consolidated tours

151

now to try to maximize 8-hour jobs, and will continue to do that.

But when you look at the competition that does some similar work

to us on the package side and you look at the folks who work in

plants, they have a much higher percentage of part-time employees

than we do. Ours is less than 10. Theirs is upwards of 40. And we

believe that, again, it is a matter of aligning the work and picking

and hiring the people to fit the work, again maximizing full-time

jobs. We are not abandoning that.

I grew up. I was a member of the union. But we do have a fiscal

responsibility here and we have to balance the two and we have

to keep rates affordable.

Ms. WATSON. Is the real issue the fact that people are using the

Postal Services less and doing more on computers and so on?

Mr. POTTER. Yes.

Ms. WATSON. What is the bottom line, and why are we in this

position?

Mr. POTTER. The answer to your question is yes, that is the main

cause of the challenge. I think when we hit the recession we kind

of hit a tipping point. There were a number of things that happened all at the same time. Businesses went back and had invested

in doing business online. They wanted to maximize the benefit

from that investment, and the way they did that was to try and

drive, as much as possible, transactions online.

By the way, it is not just business. Even the Federal Government—next year there is a law that is going into effect that would

have anyone who does tax preparation, if you do more than 20 tax

returns you have to file online. It is a good way of doing business.

We are not trying to stop progress. But we, in effect, are somewhat

the victim of changes that are taking place.

So this is not a matter of our employees not working hard. They

are working very hard. They are providing the best service that I

have ever seen in the history of the Postal Service to our customers. It is a matter of the American public and the businesses’

behavior changing and the tools that they use to conduct business

is changing, and we have to change with it.

Ms. WATSON. I am very sympathetic to that issue, having been

in that system, as I just described. If you go to part time, will you

continue the kinds of benefits that you have now for your workers?

Way back in the day, in another era, this was a perfect job for single mothers to take care, because all the benefits were part of the

package.

Mr. POTTER. It still is. It still is a great job.

Ms. WATSON. And you could adjust your hours and all.

Mr. POTTER. Right.

Ms. WATSON. So I am very, very concerned if you change that,

that we don’t put people in a lower category.

Mr. POTTER. Right. If they are career employees, as I described—

there will be a mix of some non-career and career, but the career

employees would get the full benefits that we provide under our

contract. In fact, the non-career employees, based on the health

care plan that was just passed, we are going to have to work

through the rules around that, and they will be provided health

care as required by law.

152

Ms. WATSON. I see that my time is up, Mr. Chairman, but I just

have to make this statement. In some ways I don’t see it getting

any better, because more and more and more people are online,

and it is impacting a lot of different kinds of services and industries, too. You are waiting for recommendations from this commission; is that correct?

Mr. POTTER. No. We have laid out a plan.

Ms. WATSON. You laid out a plan already?

Mr. POTTER. And we are executing what we are in control of

under that plan, and we are asking Congress for some flexibilities

that don’t exist in the current law so that we can embark on different things to bring our costs in line with the revenues we expect.

Ms. WATSON. Well, I think I heard when I came in to the meeting—I have been late—that you are not going to get rid of Saturday deliveries; is that correct?

Mr. POTTER. No, we are proposing that we do. There were a

number of panel members who you heard suggesting we not consider it, but I think it is something—what we have put together,

Congresswoman, is a series of solutions and ideas on how we can

close the gap, and I think what we have to—we suggest to everyone

that we have to have very serious dialog about all of those solutions and make tough choices on what we need to do going forward.

Ms. WATSON. Well, I want to go on record as opposing any curtailment of services on Saturday, because many of us who have to

travel from here all the way across country, the only day we can

get our mail in our hand is Saturday and act on it, because we turn

right around and come back here. I live on the West Coast. So

please, please, please—I am asking my colleagues, too—I would

strongly suggest that you continue Saturday deliveries.

With that, I yield back. Thank you, Mr. Chairman.

Mr. LYNCH. I thank the gentlelady for her thoughtful comments.

I believe this panel has suffered enough, but before proceeding

to the second panel I would like to ask unanimous consent from my

colleagues that the statement of the full committee chairman, Mr.

Towns, and a statement from the National Association of Retired

Federal Employees be entered into the record.

Hearing no objection, so ordered.

[The prepared statement of Hon. Edolphus Towns and the statement from the National Association of Retired Federal Employees

follow:]

153

154

155

156

157

158

Mr. LYNCH. I want to thank both of you for your testimony, your

help. As Mr. Issa and Mr. Chaffetz have commented, and Mr. Burton, you don’t have an easy job. We have some tough decisions to

make. But I appreciate the work that you have put into this. I look

forward to working with you on these problems as we move forward.

I bid you both have a good day. Thank you.

I would welcome our second panel to take their places.

Let me welcome our distinguished witnesses for the second

panel.

As with the first panel, it is the committee’s policy that all witnesses are sworn in. May I please ask you to rise and raise your

right hands.

[Witnesses sworn.]

Mr. LYNCH. Let the record show that the witnesses responded in

the affirmative.

Please be seated.

I am going to offer a brief introduction of each of our witnesses.

I believe each of you have been here previously. You know the

deal with the lights and the testimony. When it turns red, you

should probably sum up your testimony.

First of all, the Honorable Ruth Goldway was designated chairman of the U.S. Postal Regulatory Commission by President

Barack Obama on August 6, 2009, and she has served with the

agency since 1998. She is an experienced regulatory and public affairs professional, with expertise in citizen participation, consumer

issues, urban planning issues, as well as the mailing industry.

Mr. David Williams was sworn in as the second independent Inspector General for the U.S. Postal Service in August 2003. Mr.

Williams has served as the Inspector General for five Federal agencies. He was first appointed by President George H.W. Bush to

serve as the Inspector General for the U.S. Nuclear Regulatory

Commission from 1989 to 1996. President William Clinton next appointed him Inspector General for the Social Security Administration from 1996 to 1998 and then as Inspector General for the Department of the Treasury in 1998. In 2001 President George W.

Bush named Mr. Williams the acting Inspector General for the Department of Housing and Urban Development, while he was also

serving at the Department of the Treasury.

Mr. John O’Brien is Director of Planning and Policy Analysis at

the Office of Personnel Management. He joined OPM in April 2009.

Prior to that, Mr. O’Brien was the Deputy Director for Research

and Methodology at the Maryland Health Services Cost Review

Commission. He has a master’s degree in public administration

from Syracuse University.

Mr. Kevin Kosar has been an analyst at the Congressional Research Service since 2003. He is the author of many CRS reports

on the U.S. Postal Service, and he is the contributing editor at Public Administration Review Journal. He received his Ph.D. in politics

from New York University.

Welcome all. Chairwoman Goldway, you have the right for a 5-

minute opening statement. Welcome.

159

STATEMENTS OF RUTH GOLDWAY, CHAIRMAN, POSTAL REGULATORY COMMISSION; DAVID WILLIAMS, INSPECTOR GENERAL, OFFICE OF INSPECTOR GENERAL, U.S. POSTAL SERVICE; JOHN O’BRIEN, SENIOR ADVISOR TO THE DIRECTOR,

U.S. OFFICE OF PERSONNEL MANAGEMENT; AND KEVIN

KOSAR, ANALYST IN AMERICAN NATIONAL GOVERNMENT,

CONGRESSIONAL RESEARCH SERVICE

STATEMENT OF RUTH GOLDWAY

Ms. GOLDWAY. Thank you, Chairman Lynch, Ranking Member

Chaffetz, Congresswoman Watson, and Congressman Connolly, and

other members of the committee and subcommittee. Thank you for

the opportunity to testify at this hearing today.

First, I would like to assure the public that changing from 6 to

5 days is not a done deal. It requires the consideration of both my

Commission and the Congress, and no decision has yet been made.

The Postal Service presented today its litany of problems and

worst-case scenarios, but what do they propose? In two words, reduce service. Fewer employees to serve the public, fewer plans and

fewer retail facilities, and fewer collection boxes. The plan also

eliminates Saturday mail delivery, always considered a competitive

advantage for the Postal Service.

Ultimately, the Postal Service would become a shadow of itself,

and those who rely exclusively on the mail, the elderly, the poor,

rural America, and those who cannot or will not connect to the

Internet, may suffer the most.

Even more troubling, its plan stops at 2020, with nothing to arrest mail declines after that. On the contrary, the plan will spur

more declines, a downward trajectory that further shrinks the system, with mail and this fundamental communications infrastructure disappearing in tandem. This vision of the future is not inevitable. Neither the $238 billion deficit nor the double-digit volume declines seem credible to

me. Even in the Internet age, mail has a unique power to touch

readers and deliver results for senders. It can drive sales, provide

privacy, deliver votes, and shape important personal decisions that

affect life and country.

America’s mail system can be reinvented and re-energized for a

new century of customers; the Postal Service plan, however, has no

growth and little innovation, only straight, downward-sloping trend

lines.

In my 12 years on the Commission, I can recall times when the

Postal Service predicted billion dollar losses and ended the year

with billion dollar gains. This year the Postal Service reports

through February indicate that it is $1.2 billion ahead of forecast.

Mail volume is down by 8 percent, but standard mail and shipping

service volumes are up. And both of these products are sensitive to

economic conditions and are positive indicators of the economic

turn-around.

Given this level of variability in only 6 months, projections that

lie 6 years or more ahead are simply unreliable. Rather than beginning with the premise that cuts in size and scope are the only way

to solve deficit problems, address these fundamental questions

first: what does the law require? What is best for the Nation? How

160

can the Postal Service maintain and improve its universal service

obligation? These are the questions that the PAEA requires our

Commission to ask. GAO and the Postal Service offer recommendations without this context.

An axiom in the business community is a company can’t cut its

way to success. You need something new. And the consensus in the

mailing community is that there is not much new in these two reports.

The reports should have first looked at how to keep open as

many post offices as possible, what new products the public needs

that the Postal Service is uniquely positioned to provide, and how

to keep delivery at 6 days, and then how to determine the products

and service levels that are most advantageous to its future success.

The Postal Service efforts to expand customer access through

Internet use and sales of stamps at supermarkets are commendable, but ask the small towns of America if they think Government

business should be conducted in Wal-Marts. Envisioning the future

calls for a transformative process, not a capitulation to big box retailing.

My written testimony includes many ideas I would have proposed for the Postal Service to accomplish by 2020 and others now

being studied by my Commission staff. Among them, develop mail

products based on value to the customers, not to rely on volume.

This is the fundamental tenet needed to fix the Postal Service’s

broken business model. Provide a one-stop shop for Government

services. Participate as a full partner in the Nation’s Census in

2020. Commit to having a network of post offices in key locations

open longer hours, even on Sundays. And guarantee at least one

24/7 post office in every big city in America. Convert the vehicle

fleet to run on electricity, reducing annual fuel and maintenance

expenses by more than $400 million.

Incremental improvements compound and beget real growth.

Nevertheless, I am not a Pollyanna. The Postal Service is facing

serious financial difficulties. It may run out of cash at the end of

this fiscal year. Over the past 3 years, the Postal Service paid $15

billion or more to the Treasury, while borrowing more than $8 billion from the Treasury. Borrowing these payments does not make

sense. Only borrowing for investment in the future does.

The question of whether the Postal Service has been overcharged

by $75 billion for its pension liability will be reviewed by the Commission using an independent actuary, and we plan to issue our report about this this summer.

And the Commission is now evaluating the Postal Service’s plan

for eliminating Saturday mail delivery. In addition to our docketed,

on-the-record hearing at the Commission, we will hold a half dozen

hearings across the Nation, and have so far received more than

1,500 comments. Our findings and the public record we develop

will be available for your consideration within 6 to 9 months.

Before Congress agrees to major service cuts, it should resolve

the pension and retiree benefit issues, and the Commission should

be allowed to complete its analysis of the 5-day delivery proposal

and then present it to you.

As the economy rises, it will carry the mail with it. We must use

the up-swing to change the Postal Service into a vibrant commuVerDate 11-MAY-2000 14:19 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00164 Fmt 6633 Sfmt 6633 U:\DOCS\58338.TXT KATIE PsN: KATIE
161

nications network, providing universal service and meeting changing customer needs and demands.

That concludes my testimony. Thank you.

[The prepared statement of Ms. Goldway follows:]

162

163

164

165

166

167

168

Mr. LYNCH. Thank you.

Mr. Williams, you are now recognized for 5 minutes.

STATEMENT OF DAVID WILLIAMS

Mr. WILLIAMS. Mr. Chairman and members of the committee,

thank you for asking for our testimony today. The Postal Service’s

financial condition is serious. The situation is a product of the economic downturn and the chaos of the digital age that has sent

shock waves through the communications sector of the economy.

Further, the Postal Service entered this storm with some chronic

problems that had been masked by its success in earlier years.

Two pathways lie before the Postal Service. The most obvious is

the serious financial crisis with temporary patches that will consume the energy for change and will leave mounting debts with little chance of repayment. The other pathway is much more hopeful.

The current crisis is an opportunity to migrate toward a lean and

successful enterprise that is well positioned for a highly adaptive

future and that thrives within the model envisioned by the Postal

Accountability and Enhancement Act. This pathway will require

long-term solutions effectively executed to address a few critically

important issues.

First, the optimization of the Postal Service’s costly network of

plants, post offices, and administrative apparatus must be accomplished as rapidly as possible while balancing commitment to service. Since 2003, the Postal Service has streamlined its network by

reducing over 130,000 employees and in 2009 alone cutting $6 billion in costs. These are credible actions, but more is needed to

match the declining mail volume projected through 2020.

Next, the rigid work rules do not match the ebb and flow of mail

and customer demand in plants and post offices. As the mail continues to decline, the need for more flexible staff to perform a wider

range of duties becomes more evident. Also, the greater use of evaluated letter carrier routes would provide better incentives to allow

for more effective management.

Third, we in the Postal Service recognize the need for a simplified pricing structure to replace the over 10,000 prices contained

in their 1,700-page customer manual. A simpler pricing structure

would be easier to use, would encourage new customers, and improve revenue accountability.

Finally, this year Congress directed the Postal Service, OPM,

and OMB to develop a fiscally responsible legislative proposal for

the Postal Service benefit payments. Our office found three areas

where over-payments are occurring: an exaggerated 7 percent

health care inflation forecast instead of the 5 percent industry

standard, resulting in an overpayment of $13.2 billion by 2016; an

excessive 100 percent benefit plan pre-funding requirement compared to OPM’s pre-funding level of 41 percent and the S&P 500’s

80 percent rate. Even using the higher 80 percent rate funding goal

would result in a $52 billion surplus.

Last, the Postal Service fund was over-charged $75 billion so

that employees could retire at promised levels. When the Post Office Department became the Postal Service, employees that belonged to the Federal pension fund now contributed to the Postal

Service. Retirement costs were divided according to the number of

169

years employees had worked for each fund. However, the Federal

pension fund paid for retirements based on 1971 salaries, not final

salaries. The Federal pension fund collected full contributions, but

paid only partial benefits.

OMB has explained that these mis-charges were in response to

what they believed to be the will of Congress expressed in 1974;

however, the 1974 language was repealed by Congress in 2003

when large over-payments were discovered. At that time, OPM

inexplicably had not detected a 41 percent over-funding error in

this $190 billion pension fund. Congress directed OPM to use its

authority to oversee the reforms, using accepted dynamic assumptions, to include pay increases and inflation. Fixing the last issue,

alone, would fully fund the pension and health care retiree funds.

The Postal Service’s $7 billion annual payments would no longer be

needed since the plans would be fully funded and interest income

could pay the annual premiums.

The Postal Service is being bled white with erroneous payments before they open their doors. The $7 billion mis-charge accounts for

66 percent of the Postal Service’s projected $11 billion loss this

year.

This is also serious because the Postal Service fund is not made

up of tax dollars. The two funding streams are employees’ own

money and money collected from postage sales inflated as a result

of the mis-charge.

The mis-charges should be backed out and fund balances reset to

proper levels to achieve the retirement reforms Congress enacted

in 2003. This would give the Postal Service a good chance of adapting to the efficient market forces envisioned in PAEA.

Thank you.

[The prepared statement of Mr. Williams follows:]

170

171

172

173

174

175

Mr. LYNCH. Thank you, Mr. Williams.

Mr. O’Brien, you are now recognized for 5 minutes.

STATEMENT OF JOHN O’BRIEN

Mr. O’BRIEN. Thank you, Chairman Lynch, Ranking Member

Chaffetz, and members of the committee. I am pleased to be here

today on behalf of John Berry of the Office of Personnel Management to discuss the U.S. Postal Service’s contribution to the Civil

Service Retirement System [CSRS].

OPM commends Chairman Lynch and the committee’s efforts to

review retirement obligations and other associated matter related

to the financial viability of the Postal Service. In particular, we appreciate the opportunity to explain our position on the recent report by the Postal Service’s Inspector General, which questioned

the calculation of postal contributions to the retirement fund.

The key question that was raised by that report is whether the

allocation of costs between the Treasury and the Postal Service to

fund postal retirees with service to the Post Office Department

prior to the establishment of the Postal Service in 1971 is fair.

That is an issue about which is open to debate.

The primary concern of OPM is that the trust funds necessary

to provide those benefits are properly funded, and it is important

to remember that the level of funding to provide benefits to Postal

retirees is not in dispute. The Postal IG’s report suggests a new,

different way to allocate costs necessary to fund Postal Service retiree benefits. The allocation formula used by OPM is that which

is directed under current law and is not, nor should it be, characterized as an overcharge. Furthermore, the allocation methodology

is consistent with sound actuarial practice and has been reviewed

by outside, independent experts.

A change to current law could reduce the share of retirement

costs allocated to the Postal Service and allow the Postal Service

to use the resulting funds for other purposes, but it would be a

change to current law and a shift from previous legislation and

congressional intent.

I would like to give a brief overview of the events that bring us

here today.

In 1971, the former Post Office Department was converted to the

U.S. Postal Service, an independent entity. Not long after, Congress considered who should be responsible for the increases in retirement obligations for individuals who were employed by the Post

Office Department before 1971 that were the results of increases

in pay. This resulted in the enactment of Public Law 93–349 in

July 1974. The law was clear that the Postal Service assumed the

obligation to the retirement fund for increases in pay upon which

benefits would be computed. Congress subsequently enacted a

number of other laws dealing with other aspects of Postal Service

funding, including legislation making the Postal Service responsible for funding the cost of living increases [COLAs] applicable to

postal annuities.

More than one of these bills included requirements that the Postal Service make payments to fund under schedules set by Congress.

During the period from 1974 to 2002, it was generally assumed

that postal payments required by legislation approximately slightly

176

less than the full funding of the Postal CRS obligation; however,

this was inaccurate. In 2002, OPM determined that if the Postal

Service continued to make payments as it had been, its liability

would be significantly over-funded.

To address the issue, OPM sent a legislative proposal to Congress, which was subsequently enacted, to convert the funding

mechanism to one applicable to the Federal Employees Retirement

System [FERS], which lowered the contributions that were required of the Postal Service. That change did not affect the Postal

Service’s obligations for cost increases due to increases in pay, because Congress understood that the inclusion of those costs was an

inherent aspect of retirement funding, which is evidence from the

committee report.

OPM’s methodology was considered in a January 2003 GAO report. In that report, the GAO ‘‘evaluated the reasonableness of

OPM’s methodologies for allocating estimated benefit payments

and other expenses between service rendered before and after July

1, 1971, the effective date of the Postal Reorganization Act.’’ In that

report the GAO suggested no major changes to the methodology

used by OPM, although it did recommend a consideration for military years of service, a modification that was made in 2006.

In 2003 the Postal Service sought a new funding policy that

would reduce its obligations. Their proposal was that the pre-1971

service be calculated on the basis of a simple years of service approach, essentially the same methodology that has been proposed

by the Postal Inspector General in its report this past January.

The matter was carefully considered by OPM and by OPM’s

Board of Actuaries at that time and declined. The Board of Actuaries concluded that the methodology OPM used was valid and it had

followed the intent of the act.

The issue that is before Congress in the past has made changes

to postal retiree fundings. We believe it is clear that OPM’s actions

have been fully consistent with the letter of the law and in accordance with sound actuarial practice.

Finally, funding postal retiree benefits is a separate matter from

the issue of retirement funding. The two subjects are intertwined

because the Postal Service wishes to use the savings from a recalculation of retirement obligations to satisfy its obligation to fund

retiree health benefits. Such a proposal reinforces OPM’s testimony. The action suggested by the IG report, transfer funds to the

Postal Service for retiree health benefits fund, are impossible without congressional action.

We appreciate the opportunity to appear before you and to explain the basis for calculating postal retirement obligations.

I am pleased to answer any questions you may have.

[The prepared statement of Mr. O’Brien follows:]

177

178

179

180

181

182

183

Mr. LYNCH. Thank you, Mr. O’Brien.

Mr. Kosar, you are now recognized for 5 minutes.

STATEMENT OF KEVIN KOSAR

Mr. KOSAR. Chairman Lynch, Ranking Member Issa, and members of the committee, the Congressional Research Service thanks

you for the opportunity to participate in today’s hearing. The committee and subcommittee requested CRS to submit written testimony that discusses a range of postal reform issues relating to the

Postal Service’s financial condition. CRS has done this.

Here my time will be used to offer some observations on the

Postal Service’s short-term and long-term financial challenges.

These observations are drawn largely from the concluding section

of my written testimony.

The short term: in the short term, the Postal Service may face

a liquidity problem, possibly as early as this autumn. At the end

of the first quarter of fiscal year 2010, the Postal Service had $0.8

billion in cash, which is a low level for an agency with an average

weekly operating expense of over $1 billion. Unless the Postal Service runs a profit over the remainder of fiscal year 2010, it will have

to borrow money to continue operations. By borrowing from the

Federal Financing Bank, the Postal Service can bolster its cash in

hand to about $6.5 billion. The $6.5 billion, however, may not be

enough to get the Postal Service through the autumn. The agency

must pay $5.5 billion into their retiree health benefits fund on September 30th, and it must pay $1.1 billion to the Department of

Labor for workers compensation in October. This amounts to $6.6

billion and doesn’t exclude any other costs that may come up.

Congress may wish to ask the Postal Service to provide it with

a time line that clarifies just how long the agency can continue operations absent legislative action. This would help address any

public concerns about the possibility of a Postal Service shut-down

occurring in November, when election ballots are being mailed, or

in December, when retailers are shipping billions of dollars of

goods through the mail.

The long term: while the Postal Service’s short-term financial

condition is clearly problematic, its long-term financial condition is

less obvious. In its report, Ensuring a Viable Postal Service for

America, the Postal Service described its plight as a rapidly worsening crisis. The report projects a cumulative debt of $238 billion

by fiscal year 2020. It is important to understand the nature of this

$238 billion figure. It is not a prediction of what will happen; rather, it is a projection, an estimate of what could happen if certain

assumptions hold. These assumptions are not certitude.

First, postal law caps the Postal Service’s total debt at $15 billion. In order for the Postal Service to reach $238 billion in debt,

Congress would need to abolish this statutory debt limit and then

do nothing for 10 years. This seems improbable.

Second, this $238 billion figure assumes the Postal Service will

do nothing to reduce its own expenses. This seems unlikely, as the

Postal Service and PMG Potter today has stated that it intends to

use its existing authorities to reduce costs by $123 billion.

Third, the report’s 2020 projection heavily rests on the assumption that mail volume will fall steadily. This assumption appears

184

to be based upon a single study by the Boston Consulting Group,

which contends that the rise of the Internet has created a ‘‘fundamental and permanent change in mail use by households and

businesses.’’

This forecast about the future demand for hard copy mail is

striking. As the figures on page 12 of my written testimony indicate, since 1930 mail volumes have grown steadily. The consultant’s forecast declares that this long-lasting trend has ended permanently.

Now, this projected 2020 scenario may be questioned on at least

two grounds: first, the use of e-mail and the Internet has been

growing since the mid-1990’s; yet, between fiscal year 1995 and fiscal year 2006, mail volume went up significantly. So thus far it

does not appear that when the demand for electronic communications goes up, the demand for all forms of hard copy mail must go

down.

Second, and relatedly, the recent drop in mail volume began

about 4 months after the U.S. economy had officially entered a

deep recession, so it seems at least plausible that the economic

downturn, not the Internet, was the more significant factor in instigating the recent sudden mail volume declines of the past 2 years.

And if that is the case, then the Postal Service’s mail volumes and

hence its revenues might rise again as the economy improves.

So Congress may wish to study further the recent decline in mail

volume to better determine whether this is a temporary change or,

as the Postal Service contends, a permanent one.

I thank you, and I would be happy to answer any questions you

may have.

[The prepared statement of Mr. Kosar follows:]

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

Mr. LYNCH. Thank you, Mr. Kosar. I actually want to thank all

of the witnesses. This was a very impressive and credible group,

very competent group of witnesses, and I appreciate your willingness to come before the committee and help us with our work.

Let’s get right to it. I will yield myself 5 minutes.

How do we resolve this difference between OPM and the Postal

Service regarding what is owed here? I mean, I understand it from

a basic point of view that there should be some type of equity in

divided service, that the Postal Service should not be asked to pay

more than its share in an employee who had divided service between the old department and the new. This seems to be a basic

sense of fairness in that, and I think that was more or less Congress’ intent, speaking quite over-simplified. How do we resolve this difference? It is a huge number, $75 billion, and it is made much more important, given the urgency of the

Postal Service’s situation right now.

Mr. Williams, how do you think we should resolve this?

Mr. WILLIAMS. Congress directed that OPM and OMB and the

Postal Service go into a room and try to decide and try to resolve

the differences, and it could be that there are a number of solutions

to this. The simplest, the easiest would be to reset the two funds.

There are other alternatives.

The emergency arises from the $7 billion annual payment. I

think that needs to be dealt with first, and then I think the funds

can be reset in a way that doesn’t devastate the Federal fund,

which would be a bad thing, but recognizes that the postal employees and the mailers have paid in enough. The funds are fully funded, and it is time to stop putting money into them.

The same thing happened back in 2002 when we realized there was a mistake and we were about to over-fund by $78 billion. As

soon as that payment disappeared, OPM showed up and tried to introduce a new bill for us to pay military pensions. Obviously, we

don’t have a military, and the Government is already financing its

military.

I think the first thing to do is to remove the emergency and stop

the bleeding, and then sort out, in the fullness of time, which of

the solutions before us is the right solution.

Mr. LYNCH. Mr. O’Brien.

Mr. O’BRIEN. Yes. Just to comment, I mean, one of the difficulties in this issue is that we tend to move between two funds. The

CRS, the funding for the retiree benefits, not your health benefits

but your retiree benefits, is essentially fully funded right now. That

is not in question. The $7 billion payment to the fund that is referred to is actually the payments to the retiree health benefits

they are separate issues, and they are real easy to conflate the two. So part of it is, though, $7 billion payments are in the law, $5

billion of them are—last year OPM, with Congress, reduced those

payments from roughly $5 billion to about $1.5 billion, and those

two issues continue on. The challenge again with the retiree benefits as we do this is simply changing the scope of the retiree and

saying we are going to fund those less. This kicks this down the

can a bit.

One of the complicated parts from our end is that these are not

sort of stand-alone issues. The implications of the decisions you

201

make regarding how we fund the retiree service will affect how you

fund the retiree health benefits, which have larger budgetary implications.

Ms. GOLDWAY. If I might just add that there is an opportunity

to look solely at the health care retirement benefit fund issue and

look at how to recalculate what that total payment should be.

Should it be the 75 percent approximately of estimated liability? Is

the liability the right amount? And what should the payments be

over a period of years?

I believe that it certainly is possible to come up with a very credible arrangement to significantly reduce the payments that the

Postal Service is obligated to make on a yearly basis by looking

solely at the decisions around that health care retirement benefit

fund, reducing the liability and spreading out the payments. I

think that is an alternative, as well, that needs to be considered.

Mr. LYNCH. Thank you.

Mr. Kosar, I don’t assume you have a horse in this race, but——

Mr. KOSAR. Absolutely not. No horse within this race.

I am not an expert on pensions, and so I won’t try to offer any

solutions.

Mr. LYNCH. Have you looked at this for CRS, though? Have you

looked at this?

Mr. KOSAR. Yes. I provide an overview in my report.

Mr. LYNCH. What do you think?

Mr. KOSAR. I don’t recall any accusation of OPM’s current approach as being against the law, and in which case, if it is not

against the law, then it is an equity question, and an equity question inevitably is going to involve lots of calculations that inevitably, I think, are probably going to be political; namely, it will

have to go to the judgment of Congress to see what it thinks fair.

I think a key point is that, as best I can tell, this is a zero sum

gain. If the Postal Service is allowed to, say, claw back some of that

$75 billion, then somebody else is going to have to pony that up,

and that somebody else I believe would be the U.S. Treasury or the

public.

Mr. LYNCH. The problem is, though, it is the work hours of the

individuals who have earned that, and so they are entitled to the

full measure of the benefit that they have earned, and as well the

mailing community has paid in for service for which it appears

they have over-paid.

My time has expired and I yield to the gentleman from Utah, Mr.

Chaffetz, for 5 minutes.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

Thank you all for being here.

Mr. Chairman, I do agree with you that we do need to come to

some sort of consensus as to what the accurate numbers are so we

can all deal from the same playing field. I hope we can ferret that

out as we go along.

Chairwoman Goldway, I am quite frankly and directly, deeply

concerned by your testimony and the perception, perhaps, that you

have of your role and responsibility. I find your testimony to be

shocking, quite frankly, that you would inject so much subjective

analysis, if you can call it that, as opposed to participating in my

understanding of the Postal Regulatory Commission’s role and reVerDate 11-MAY-2000 14:19 Nov 10, 2010 Jkt 000000 PO 00000 Frm 00205 Fmt 6633 Sfmt 6633 U:\DOCS\58338.TXT KATIE PsN: KATIE
202

sponsibility. You are the regulatory body and regulatory head of

this type of agency. The statements that I read within your testimony are very subjective, and I am very curious to understand why

and how you think it is within your duties and responsibilities to

inject that sort of personal testimony.

Let me give you an example here. You say in your testimony,

‘‘The consultants hired by the Postal Service and the GAO analysis

should have begun by looking at what it will take to keep open as

many post offices and stations and branches as possible.’’ Why

would you—you are coming to a conclusion by yourself without allowing the process to move forward, and I believe, based on your

role and responsibility, coming up to a conclusion without allowing

them to do the analysis. Why and how? Where do you think in the

Regulatory Commission’s responsibilities that is the type of statement that you should be making?

Ms. GOLDWAY. I appreciate your concern. I believe that the law

requires that the Postal Regulatory Commission define and enforce

the universal service obligation. We have to make a report on it.

We determine that every year with our compliance determination.

Is the Postal Service meeting its universal service obligation?

There are two specific areas in which the Postal Regulatory Commission doesn’t have discretion. One is the law that says post offices can’t be closed for solely economic reasons, and, two, that

service has to be provided 6 days. So I feel that the responsibility

of any agency that is operating under the law is to address their

problems assuming that they have to meet the law before they then

provide other alternatives, and I felt——

Mr. CHAFFETZ. Thank you. Let me read another statement from

you.

Ms. GOLDWAY [continuing]. The consultants didn’t do that.

Mr. CHAFFETZ. In your written statement here, ‘‘Now is not the

time for sweeping changes to the Postal Service.’’ How can you

come to that conclusion? You went on to say that we need to deal

with the—‘‘before the Congress agrees to major cuts in service, it

should resolve the pension and retiree benefit issues to determine

manageable payment schedules for the Postal Service, and the

Commission should be allowed to complete its analysis of the 5-day

delivery proposal and present it to you.’’

Now, the numbers, based on what we hear now, we are dealing

with a $238 billion shortfall over 10 years. We are talking about

a $75 billion issue. It is a significant issue, it is a big issue, but

it won’t solve all of the issues. And we talk about moving from 6-

day delivery to 5-day delivery, based on the testimony of Postmaster General Potter, in its best-case scenario that is going to be

a $30 to $36 billion fix over a 10-year period, only accounting for

about 15 percent of the problem.

So if we have such a significant problem, by the hundreds of billions of dollars, how do you, at the beginning of this process, come

to the conclusion that ‘‘now is not the time for sweeping changes

at the Postal Service?’’ When do you think we should get to sweeping changes at the Postal Service?

Ms. GOLDWAY. What I am proposing, which I don’t think is very

different from some of the colleagues here on the panel with me,

is that——

203

Mr. CHAFFETZ. Well, they have different jobs. They have different

jobs, roles, and responsibilities.

Ms. GOLDWAY. Well, I believe that the Postal Service could meet

its obligations for the year with an adjustment to the health care

retiree benefit fund.

Mr. CHAFFETZ. You think that would solve the entire problem?

Ms. GOLDWAY. I don’t think it will solve the entire problem, but

I think it will provide us, given that and the economic turn-around,

an opportunity to come up with proposed changes that are of greater acceptance to the country and that meet a universal service obligation. You, yourself, are concerned about cutting 6 to 5-day——

Mr. CHAFFETZ. Yes, I have a different job, role, and responsibility

than you do as a regulator.

Ms. GOLDWAY [continuing]. And my written testimony includes,

in reviewing the 6 to 5-day issue, which the Commission will be

doing and doing very thoroughly, that we would consider such

things as a pilot project or alternatives and——

Mr. CHAFFETZ. Let me move on. Let me read another quote from

you.

Ms. GOLDWAY [continuing]. And we would consider that.

Mr. CHAFFETZ. I am going to move on, please.

Quote: ‘‘But ask the small towns of America if they think the

Government business should be conducted in Wal-Mart. Why would

any rational person compare the functions of a post office to WalMart as the Postal Service consultants did?’’ I do not understand

why or how you are injecting your personal opinion. Are you speaking for yourself? Are you speaking for the administration? Are you

speaking for the Postal Regulatory Commission?

Ms. GOLDWAY. I am certainly using the opportunity to speak as

the chairman with my own point of view.

Mr. CHAFFETZ. So this is your personal point of view? It is not

from the Postal Regulatory Commission?

Ms. GOLDWAY. In my testimony I have a specific line in terms

of the Commission’s support for adjusting the health care retiree

benefit fund, and that is a Commission position.

Mr. CHAFFETZ. And you don’t think the——

Ms. GOLDWAY. And I have pointed out that the Commission will

be reviewing the 6 to 5-day delivery and making a considered opinion on it. But I do, quite frankly, feel that the Postal Service’s response to its universal service obligation to provide service through

post offices, offering a substitute which would allow those services

in some fashion or another to be provided at a Wal-Mart and close

post offices in communities is not an acceptable part of the responsibility of the universal service obligation, and I don’t think that is

in violation of the law, and I think it is certainly consistent with

my role as chairman to lead the Commission in evaluating what

universal service is.

Mr. CHAFFETZ. Well, Mr. Chairman, my time has expired. I appreciate it. I am deeply concerned by these personal conclusions

prior to the analysis and the recommendations of what has to be

a creative process, and I hope we further explore this.

I thank you for the time and yield back. Thanks.

Mr. LYNCH. I thank the gentleman.

204

The Chair recognizes the gentleman from Virginia, Mr. Connolly,

for 5 minutes.

Mr. CONNOLLY. I thank the Chair, and, gosh, I am surprised that

my friend who is so concerned about personal conclusions would

cite a bogus number, $238 billion. We have already established in

this hearing at best that is a theoretical number. GAO admits, and

the Postmaster General, himself, admitted under questioning by

this Member that it assumes they are not going to make the $123

billion cuts he announced this morning they are going to make, and

so it is a made-up number designed to scare us into breaking faith

with communities across the United States, breaking faith with organized labor and the work force, breaking faith with consumers in

order to make decisions they have decided a priori they want to

make, irrespective of whether there is an empirical basis to justify

making those decisions or not. That is what that $238 billion figure

is—it is made up. It assumes nothing will happen. Nothing will

happen over 10 years.

Mr. Kosar, you detailed this really well in the CRS report. Could

you refresh our memories, going to page 11 of the CRS report? I

assume that is your writing?

Mr. KOSAR. Correct. Are there particular aspects on it, or is it

the three main points? Are there particular aspects of the point I

made, or just kind of generally encapsulate what I was getting at

here?

Mr. CONNOLLY. Well, if I recall your analysis, it says in order to believe $238 billion, you have to believe, A, this Congress will lift

the statutory debt ceiling limit, right?

Mr. KOSAR. Correct.

Mr. CONNOLLY. Which right now is $15 billion?

Mr. KOSAR. Correct.

Mr. CONNOLLY. Second, you have to assume this Congress will

take no action whatsoever for 10 years with respect to any kind of

fiscal red ink problem the Postal Service might experience; is that

correct?

Mr. KOSAR. Correct.

Mr. CONNOLLY. Absolutely no action?

Mr. KOSAR. Absolutely no action.

Mr. CONNOLLY. Third, you would have to assume that the $123

billion of cuts that the Postmaster General announced today and

said is already within his authority, he doesn’t need new legislation

or legislative authority to make those decisions, will, in fact, be rescinded, will not be made; is that correct?

Mr. KOSAR. Absolutely correct.

Mr. CONNOLLY. And then you would have to assume that everything goes to hell in a handbasket. Apparently, there is no economic recovery that could influence up or down the volume of mail,

even though we know from history that, as a matter of fact, the

opposite is true: economic conditions most certainly do influence

whether mail goes up or down volume; is that not correct?

Mr. KOSAR. That is correct.

Mr. CONNOLLY. Other than that, the $238 billion number is real.

Mr. KOSAR. Depends how you define real, I suppose.

Mr. CONNOLLY. Would you refresh our memory, Ms. Goldway, in

terms of the statutory role of the Postal Regulatory Commission?

205

Ms. GOLDWAY. The Postal Regulatory Commission is a regulatory

body overseeing the activities of the Postal Service to ensure that

it does provide universal service at a fair and efficient level for all

citizens. We provide an annual compliance determination every

year, and should we determine that they don’t meet universal service obligations we can institute proceedings to require them to

change their activities to meet universal service obligations.

Mr. CONNOLLY. Apparently, because we don’t like some of your

testimony, we want to relegate it to the realm of personal opinion.

Does the statute in any way invite the Postal Regulatory Commission to comment on proposals with respect to quality of service or

fiscal savings? Is that a role under the statute for the Postal Regulatory Commission?

Ms. GOLDWAY. Yes. Our reports do that and we are asked to do

studies, to report to Congress, to suggest legislation, and to make

changes in—suggest changes in the universal service obligation

over a period of up to 10 years.

Mr. CONNOLLY. Were you invited here today in your capacity as

chairman of that Commission?

Ms. GOLDWAY. Yes, I was. Thank you.

Mr. CONNOLLY. And did the committee ask you to, in fact, share

your views on the pending proposals, good, bad, and indifferent,

with respect to savings and cost efficiencies?

Ms. GOLDWAY. Yes, they were. Thank you.

Mr. CONNOLLY. Thank you.

Thank you, Mr. Chairman.

Mr. LYNCH. I thank the gentleman.

The Chair recognizes the gentleman from Illinois, Mr. Davis, for

5 minutes.

Mr. DAVIS. Thank you very much, Mr. Chairman.

I want to thank the witnesses for being here.

Chairwoman Goldway, let me just kind of followup with you. Mr.

Potter has made a series of recommendations that he thinks would

help get us beyond the dilemma that we are in. Has the Commission taken any position on any of those? Or let me ask it another

way——

Ms. GOLDWAY. I don’t think the Commission has been in a position to take a formal action on any of these proposals. They are not

presented to us in a way in which we would act upon them formally. But I have consulted with my colleagues, and we have

agreed that we, all five of us, believe that the health care retiree

benefit fund should be adjusted, so that I can speak on behalf of

the whole Commission with regard to that position.

With regard to 6 to 5-day delivery, we are in the process of hearing that case and are committed to having a full and open discussion where we will hear all points of view and consider all of the

concerns that were raised here at the congressional hearing this

morning and many others. In particular, we are going to look at

the question about how much cost savings there really will be.

There is a dispute between the initial figures we had, and the Postal Service’s, about how much savings you could have from closing

post offices—excuse me, from 6 to 5-day delivery.

So we will thoroughly review that, and I hope we will be able to

make a considered advisory opinion to the Postal Service on what

206

we believe is the right way to go, and we will share that opinion

with the Congress, and our hope is that you will wait to hear our

opinion and advice and the expert testimony that we can develop

in that case before making your own decision about whether to

change from 6 to 5-day.

Mr. DAVIS. It would appear to me that some of these, as I look

at them, really aren’t that difficult to—for example, shift in retail

sales to some place other than a facility doesn’t seem to me to create that much angst.

Ms. GOLDWAY. I don’t think anyone is concerned with increasing

the amount of stamps that are sold at supermarkets and expanding

as much as possible the access to Postal Services on line, but you

can’t ship a parcel out of a supermarket and you can’t do it online.

The law says anything over 13 ounces has to be handed personally

to the post office. You can’t get your passport that way. You can’t

do a whole range of special services that are integral to the universal service of the Postal Service at a grocery story unless the Postal

Service is presenting a plan to open a full retail facility in a supermarket. They haven’t presented that plan to us, and if that is an

option to substitute for post offices, I don’t think the Postal Service

would—I don’t think the Postal Regulatory Commission would feel

that was any change at all in universal service.

So the question is the level of service that is currently provided

that we feel represents universal service for the country, and to

make sure that is maintained.

The one other thing I would say is that there are many post offices around the country, not just in the smallest rural towns but

in many areas, that see the post office as a neighborhood icon, and

as an anchor for other economic activities in their community, and

for you to close that post office and move it into a big box retailer

at the suburban fringe of the city is not——

Mr. DAVIS. Let me just ask Mr. Kosar, though——

Ms. GOLDWAY [continuing]. Something that most people would

support.

Mr. DAVIS [continuing]. A question before my time runs out. I appreciate it.

Mr. Kosar, how important do you think it is that we stabilize the

service on a short-term basis as we pursue long-term solutions?

Mr. KOSAR. Well, my understanding is essentially that once the

Postal Service runs out of cash that it can’t keep operating. I don’t

know of any sort of emergency line that it would be able to access.

It is possible it exists, but I have never heard of it spoken of, and

if it doesn’t have the cash, then I don’t know how it could go forward meeting payroll and continuing operations.

Mr. DAVIS. So it is absolutely essential that we continue to operate while we pursue long-range solutions that might take much

more time?

Mr. KOSAR. Whether Congress decides to choose to pursue a

short-term solution or a long-term solution or a solution that is a

hybrid that can do both is not for me to call, but if Postal Services

are to be continued, as I understand it, the liquidity issue will have

to be dealt with.

Thank you.

Mr. DAVIS. Thank you very much. Thank you, Mr. Chairman.

207

Mr. LYNCH. Thank you.

Let me ask Chairman Goldway, Section 701 of the Postal Accountability and Enhancement Act requires that the Postal Regulatory Commission present recommendations to Congress and the

President for legislative changes or improvements to the postal law

by December 2011.

Ms. GOLDWAY. Yes.

Mr. LYNCH. Still a ways away, but have you begun that process?

Ms. GOLDWAY. Well, I initiated a study to help us pursue the notion of the social value of the mail, and we want to flesh that concept further.

Mr. LYNCH. So you are not very far along the road then?

Ms. GOLDWAY. And then we will combine that with our next universal service obligation study, which we probably will do within

the next year.

Mr. LYNCH. Yes. Well, time’s a-wastin’.

Ms. GOLDWAY. I appreciate your interest.

Mr. LYNCH. We are going to have some changes.

Ms. GOLDWAY. I will try to get a——

Mr. LYNCH. Yes. You might want to ramp up that part. It says

you need to make it by December 2011. That is the drop-dead date.

But you can certainly make it before, and I think the circumstances would probably dictate that you would probably want

to make those recommendations sooner rather than later.

Mr. Williams, you indicated that Congress had directed you and

OMB and OPM to go in a room and hash this thing out. Have you

gone into that room?

Mr. WILLIAMS. We would not represent the Postal Service. There

has been an initial——

Mr. LYNCH. Well, yes. OK.

Mr. WILLIAMS [continuing]. Meeting, and it involved the principals and some staff, and I think they are now preparing for a second round of talks to try to come to agreement on which of the solutions would be the proper solution for the issues.

Mr. LYNCH. Yes. This $75 billion question, we have to fish or cut

bait here.

Mr. O’Brien, what would happen if the post office didn’t make

the payment to OPM?

Mr. O’BRIEN. Again, for the retirement services the payments

have already been made. The retirement fund is fully funded, or

virtually fully funded at this time. What the IG report suggested

was that if you change the allocation methodology that has been

used, funds would be freed up from the retirement pension system

that could go to other purposes specifically to address the health

retirement fund. So, again, the two funds are somewhat——

Mr. LYNCH. Are you talking about the annual payments?

Mr. O’BRIEN. The annual payment is for the retirement health

fund. If those payments are not made, specifically what would be

the issue in terms of the retirement payment. I need to get back

to you on the health fund. But, again, I want to stress that the retiree fund and the benefits to retirees for their retirement payment,

those are funded, or virtually fully funded right now, and there is

no threat to a retiree getting their retiree pension.

208

Mr. LYNCH. Right. Right. We are talking about the imbalance of

payments relative to service here. I must confess I sort of come

down on the side of the Postal Service on this argument, at least

the way it has been argued thus far. I would just encourage you

to reconcile. We will just be following you on that line of progress,

OK?

I will yield to the ranking member.

Mr. CHAFFETZ. Thank you, Mr. Chairman.

Mr. Kosar, I want to make sure I understood you properly. I

mean, part of the challenge that is before the Postal Service is the

economic downturn that is happening in this country, but to what

percentage or to what degree do you also acknowledge the move to

e-commerce and electronic communications and those types of

things? Is that part of what you have looked at along the way? I

just notice that you kind of didn’t mention that portion of it, and

it just raised some curiosity, that is all.

Mr. KOSAR. Sure. And I apologize for any omission. It, I think,

is pretty clear that the most lucrative postal product amongst the

mail classes, first class mail, is being eroded by e-commerce. People

are switching to electronic bill paying, and so your high-margin

product—and first class mail is a high margin product because it

is sealed against inspection, you need a warrant to open it, not like

lower classes of mail.

Mr. CHAFFETZ. Right.

Mr. KOSAR. So that is being eroded, and that is a long-term

trend, and I think it is perfectly believable that trend will continue,

and that creates an interesting revenue situation.

At the very end of my written testimony, I note that there—I

mention this because there is a changing composition to the mail

volume. More and more of it is becoming advertising mail, which

is a lower margin product, and so that has revenue implications,

and it also has policy implications because the Congress created

the Postal Service to deliver mail for a number of purposes—literary, binding up the Nation, etc.—and if it is only delivering mail

in 2020 for business purposes, well, it is a different scenario.

Mr. CHAFFETZ. OK. So Chairwoman Goldway said, ‘‘Now is not

the time for sweeping changes to the Postal Service.’’ If we don’t

have any changes, what is the effect?

Mr. KOSAR. I don’t know, because everything is so contingent

upon the mail volume question. Mail volume equals revenue, and

revenue versus cost is——

Mr. CHAFFETZ. Do you see e-commerce declining over the course

of time? Do you see us moving less? I mean, do you see us doing

less e-commerce and less electronic communication?

Mr. KOSAR. No, I don’t see us doing less e-commerce. I would

presume we would do more and more absent some sort of peculiar

incident.

Mr. CHAFFETZ. Right.

Mr. KOSAR. An attack on our cyber system. But the relationship

between the growth in e-commerce versus hard copy mail demand

strikes me as rather complex. I don’t know if the PRC has studied

and tried to figure out how the elasticities work, but, just based

upon the historical data, I don’t see a clear relationship.

209

Mr. CHAFFETZ. But if we don’t do anything, based on historical

data that we have now, the trajectory is not very pretty, is it?

Mr. KOSAR. The trajectory of mail volume or the trajectory based

upon a financial——

Mr. CHAFFETZ. The trajectory of financial situation, financial viability of the Postal Service.

Mr. KOSAR. Yes. I would be—realizing the large payments going

forward that are required under the Postal Accountability and Enhancement Act, these are very significant payments, and I know

that the Postal Regulatory Commission has suggested that instead

of $5.5 billion a year the Postal Service should be paying $3.4 billion, and the Inspector General has suggested $1.9 billion. This has

large cumulative effects over the long run, and so yes, I think it

is an issue to be addressed.

Mr. CHAFFETZ. Interestingly enough, as the mail volume has decreased, we see this 80 percent labor cost is not necessarily diminished. It is such a huge portion of what is going on. My understanding is that this 80 percent number, even though the volume

has gone down, has not certainly been adjusted. Can you give further insight or things that you found in terms of the labor cost as

a ratio to the overall expenses, and the implications of that, because you are going to have to deal somehow, some way, with these

massive labor costs, are they not?

Mr. KOSAR. If the Postal Service must either control or lower its

costs over the long term, then obviously the large target is the

labor cost, because, as you noted, and as GAO has noted, it is about

80 percent. And the Postal Service has had some success in contending with this. I know since fiscal year 1999 they have reduced

the size of their work force from over 900,000 to just under

600,000. Of course, many of these people are moving into being retirees, and so there is that obligation.

Mr. CHAFFETZ. Right.

Mr. KOSAR. But at least in terms of salaries, that is lowering it.

Mr. CHAFFETZ. Right.

Mr. KOSAR. But their options are rather limited because they

have collective bargaining agreements with the vast majority of

these groups, and I believe at least two if not three of the contracts

forbid layoffs. Of course, they have other provisions in there which

curtail the Postal Service’s ability to excise what they consider to

be extra persons.

Mr. CHAFFETZ. OK. Thanks, Mr. Chairman. I am right near the

end of my time. Thanks.

Mr. LYNCH. Thank you.

Let me ask, we had asked the Postal Service, as part of their

presentation, part of their report that was delivered today, to actually look at comparable mail systems and what other countries are

doing, and that part has not been included. They are going to do

that a little bit later, although Mr. Potter did offer a few suggestions anecdotally.

I know that one of the Scandinavian countries, I think it might

be Sweden or Finland, has a system in place now where you can

actually, it is like a virtual mailbox. Your computer screen, whether it is a laptop or even a BlackBerry or desktop, you can actually

click on your mail that is at the post office and you can actually

210

click on the stuff you want delivered. I don’t like the term junk

mail, but you can also flag stuff for non-delivery; in other words,

you don’t want it delivered.

It just seems a matter of time until that type of technology software is going to be available to the American public. If mail volume

has dropped already, I can imagine what is going to happen when

we have that type of technology available to us. It is certainly not

going to go up.

Have you thought about the implications, Ms. Goldway especially. You seem to have an optimistic view of what the future

might hold for normal mail.

Ms. GOLDWAY. Well, since I spent 4 years in Finland, I will just

comment that this experiment that the Finns are doing is in one

of what they call their big cities, which is about 200 people. It is

a small experiment that they are trying on this product. But the

Finns are way ahead in terms of technology, and it certainly may

catch on there.

I was speaking with the head of Deutsche Post yesterday and

they still provide 6-day delivery, and what they were valuing most

about their mail was the privacy of the mail. E-mail does not provide privacy.

Mr. LYNCH. What is the cost for a——

Ms. GOLDWAY. It is 80 cents.

Mr. LYNCH. Eighty cents.

Ms. GOLDWAY. They pay 80 cents, and it is a smaller country.

The delivery costs are less. I am sure that they are making more

profit on their mail than we do.

They haven’t had billing in their mail for 20 years, so the declines they have had are much smaller, the European declines.

Every country is quite different. But what struck me was his argument that the letter carried against inspection is of such value in

a country that has experienced the political regimes that they had

in the 20th century, the Nazis and then the eastern Germany regimes, and you cannot have a system, at least not yet, and it

doesn’t look likely, an e-mail system where person to person you

have the same privacy. We now have systems where you can bank

with fairly good security systems. There are walls and protections.

But person to person correspondence is simply very risky on the

Internet.

So I think there are still great values for the mail we have, and

in my testimony the first thing that I suggested the Postal Service

do—I certainly don’t want them to stand still—is to change the

focus from volume to value, and if they create a series of products

that are of great value to people in the mail, they are more likely

to get the high margins they need to keep the mail system and the

other services that are part of the universal service available to

people.

Mr. LYNCH. I understand what you are saying, but——

Ms. GOLDWAY. And, by the way, in regard to European

comparisons——

Mr. LYNCH. Let me——

Ms. GOLDWAY [continuing]. We are intimately involved with

those.

Mr. LYNCH. Will you just let me speak?

211

Ms. GOLDWAY. I am sorry.

Mr. LYNCH. The person to person mail, though, is microscopic in

the current mail system, people sending letters to each other. It is

really a microscopic part of the——

Ms. GOLDWAY. It is about 5 to 6 percent of the mail, and when

you consider what the potential is for growth in small businesses,

which are quite comparable in terms of the transactions that are

happening—and everyone agrees that there is a great deal of

growth potential in small businesses.

Mr. LYNCH. I think business has remittances and commercial activity.

Ms. GOLDWAY. No. Think of all the people who are setting up

businesses in their homes, and in addition to the electronic communications that they have there, there is personal correspondence,

individual pieces of material.

Mr. LYNCH. I know. Yes. Businesses can be located in a home.

That is still a business, though.

Ms. GOLDWAY. It is still a business, and——

Mr. LYNCH. It is just a different driver than——

Ms. GOLDWAY [continuing]. And it can——

Mr. LYNCH [continuing]. Social interaction.

Ms. GOLDWAY. Yes. And it can create volume, but I think it

would be volume—if the Postal Service focuses it right, it is volume

that is of high enough value that you can charge more for it and

keep your margins up so you don’t have to rely on advertising mail.

Mr. LYNCH. OK. My time has expired.

As I understand, we are about to have votes. I want to thank you

all for your willingness to come before this committee and help us

with our work. We, I am sure, are going to have more hearings on

this and more discussions. Thank you for your cooperation and

your assistance. Have a good day.

[Whereupon, at 1 p.m., the subcommittee was adjourned.]

[The prepared statements of Hon. Gerald E. Connolly and Hon.

Diane E. Watson, and additional information submitted for the

hearing record follow:]

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

249

250

251

252

253

254

255

256

257

258

259

260

261

262

263

264

265

266

267

268

269

270

271

272

273

274

275

276

277

Æ